News
Views from the street by Alistair Macleod
19/02/2010 08:13:00
Cuts and cost increases
ALMOST every day now we hear of politicians competing on promised cuts in government spending, yet at the same time there seems to be a mismatch between the rhetoric and the reality. Expenditure is increasing in Afghanistan, more troops, more helicopters. The war is costing £43.49 billion* a year. One Chinook alone costs £55 million while a postponed new Orkney hospital would cost around £30 million. Meanwhile other capital projects like the Aberdeen bypass get the green light, there is talk of a multimillion-pound high-speed railink, and millions are being spent on the Olympic Games.
Some of this is the result of open ended commitment by governments, the
'whatever it costs' approach, in other situations they seem like
dinosaurs, unable to respond quickly to changing circumstances. Capital
projects agreed say two or more years ago and still in the design stage
are coming to the implementation stage now, in a recession. It's called
lead time, meaning the time it takes for a project to be conceived,
planned, designed, approved and then implemented.
Many large capital projects take far longer than the 4-5-year lifetime
of a government or local council so it is fairly likely that they can
be conceived in a boom and implemented in a bust or vice versa.
Revenue budgets, that is the running costs of services, used to be on a
year-to-year basis and for many services this still holds, although of
late there have been moves to give longer assurances on budgets.
Mothballing is an option on some projects but it is not easy or wise
always to do it. If you mothball now, when you revive the project in
say four year's time the costs may have escalated beyond the ability to
pay for it. This is very true in building construction, and defence
contracts. This is one of the reasons some have called for already
planned capital projects to proceed, while interest rates are low and
to keep a skilled work force in place.
Another key problem when you have boom bust type economy is that
apprentices are not taken on in the bust period so you find yourself
short of labour in the boom.
George Soros, the great American entrepreneur and financier, says that
an economic downturn is just the time to invest because costs are low.
There is another reason why cuts may not be desirable at national and
local government level, and that is the unforeseen outcome rule. A
classic of the unforeseen outcome in biological terms was the
introduction of rabbits into Australia. Introduced for game they spread
and bred in plague proportions and became a huge cost to sheep farmers
and the economy.
Likewise a small cut in local or national government spending can result in greater costs elsewhere.
One problem is when each body or department is told to separately seek
cuts and no account of the overview is taken. As someone rightly
pointed out, cuts in wardens today could mean overall care costs rise
to the public purse tomorrow, as independent living is lost.
Failure to grit pavements means an increase in falls and fractures
costing the NHS money. Locally there is supposed to be a partnership
between OIC and the NHS. Can't we make the connection in budgets as
well as management? How many more examples are there of a saving in one
budget causing an increased cost in another?
Cutting public sector jobs - perhaps less damaging in a boom - can mean
an increase in welfare payments in a bust as more go on the dole.
The buzzword in governments and business today is resilience.
Resilience means more than just hanging on like a limpet while the
waves buffet you. It means preparedness for and ability to survive in
the face of threats whether they be global recession, water shortages,
budget restraints, climate change, flooding, new legislation and so on.
So, it means having more than one energy source, more than one income
stream, having reserves, being prepared and trained for every
eventuality.
You would think that large organisations are the most resilient but you
could be wrong. Size itself can mean more resources but can also mean
cumbersome procedures, hierarchies, rigid thinking, and poor
communication within the organisation.
In some ways the credit crunch was a function of questionable
investment strategies, but also of size; bigger and bigger banks with
fewer controls, and senior management with a questionable grasp of what
the bright young things were up to. And being big, when these big banks
crashed they really crashed, affecting us all.
Are governments and local authorities about to make the same mistake? A
Siberian winter of cuts on a huge scale that slows the economy right
down again? And Scotland and Orkney are very dependent on local
government spending.
The interesting juxtaposition of proposed cuts and the MPs' expenses
row has raised another spectre; the near Dickensian differential
between rich and poor in this country now. Yet who has the political
courage to tackle this?
It's for sure that we will have to change our spending patterns. Many
on middle incomes have been spending on stuff they didn't really need.
We had got beyond the basic needs of shelter, food and minimum clothing
and heating.
Cuts and increased costs are already falling disproportionately on
those in lower income brackets. A man on £70,000 a year spends less
proportionately on heating than a pensioner on £10,000. The £70,000 man
can absorb price hikes in petrol by cutting back on luxuries while the
poor man may not and cuts essentials. The rich man has more room for
manoeuvre, he can downsize.
But what if you have already downsized and there is no down left?
By all accounts Haiti was impoverished before the quake and the people
had little, save themselves. Yet these people had survived previous
quakes and hurricanes. Materially they didn't have what we have.
The Haitian earthquake was a terrible event causing grief pain and
hardship; out of the rubble came people who had stayed alive for days.
In the streets people set up homes and after a while markets even
opened. Yet there was violence as people looted in desperation and
fought for aid.
Just how far are the cuts going to push our society, how will we tackle
the inequalities between rich and poor and the mismatches in our own
spending as well as those in government spending?
*source ukpublicspending.co.uk.