The Public Sector Time Bomb

I can wax lyrical on the recent revelations on MP Expenses which I firmly believe are just the thin edge of the wedge. There are over 600 MPs in the main House alone who are running personal and departmental expense budgets larger than the total budgets of a great proportion of Britain's raft of small businesses, who are currently struggling so hard to survive this recession.

But that really isn't the half of it - by a long, long chalk. This recession has crippled British business and the private sector has taken almost the entire brunt of it. This week, Teachers will be the next sector to demand a 10% pay increase and they are getting peaky already over other issues like Sats for 7 year olds - if they can strike for that, then surely striking for pay is a short hop. Meanwhile out in the Neverland of council workers, The Tax Payers Alliance revealed this week that many Council chiefs received pay rises of above 10% last year, while over 1,022 public servants earn in excess of £100,000, a number which swelled by 27% in a single year, and 16 of these people now earn above £200,000 a year - a salary that not even Gordon Brown enjoys.

We can get uptight about these figures indeed - the inefficiency of public sector organisations is just stupid - and it isn't just salary bills. Many public sector organisations, the total of which now account for 1 in every 4 jobs in the UK, employ a raft of contractors through 'outsourced' contracts for certain work rather than directly employ them plus many new infrastructure investments like the NHS database have an enormous number of external 'consultants' swarming over uncontrolled and spiralling projects. You would then start shuddering at the rise in the number of politicians we directly fund in the new tiers of Government from European Parliament and the Commissioners down to Assemblies and Councils and other related bodies we just don't think about.

Sharing The Pain

Largely all those jobs have continued as normal with just a few minor cuts here and there. As the burden of Unemployment increases on the Welfare System due to the raft of workers laid off from private firms, and the ever-increasing sums being pumped into our sorry financial system, the Budget Deficit is rising alarmingly, much faster than anyone thought from Government to research institutes. About the only place that got it right was the IMF who all along said this was going to hit Britain harder and for longer than most other places.

It is easy to see why when such an enormous proportion of Government spending goes on keeping politicians and civil servants in jobs. But these are not just any jobs. These jobs have the most lucrative pension schemes outside of Fred Goodwin's. A 10% rise in salary in one year for Council executives earning so much has a truly massive effect of the requirement to fund the same people's future pension dues.

In the recently published accounts of the NHS alone, the pension deficit is currently running at £212 billion.

The whole Public Sector pension requirement is a ticking Time bomb of nuclear proportions and it is not included in any of our borrowing requirements today. But you can be very certain of one thing, we will have to pay for it.

Pension Hurt

I am one of the vast number of people in the UK who regularly saves a significant proportion of my earnings, while my employer also contributes. However, my current outlook on any future pension is looking as dreadful as our general economic position. But it is actually far worse. As one of the private sector workers, I will be paying disproportionately more of my money to fund not just the salary increases of the Public Sector but the vast rift between what the Government has set aside for pensions and what is needed to pay them. It means that my future earnings will be far less in order to pay for this and I don't think much of that has been factored into the current gloomy talk about public finances, national borrowing and future tax liabilities.

The Institute of Fiscal Studies (IFS) paints a very gloomy picture about the rise in the budget deficit after the release of lower tax revenues and higher bail outs. Adding it all up, the IFS reckons that UK debt will be 77% of GDP by 2013.

The Time Bomb

While we talk of ever increasing amounts of spending, at some point the whole issue of public finances has to be sorted out and right across the board. Right now, we have too many jobs in too many places in the public sector which are just superfluous. We have too many uncontrolled contracts with third party firms which are sumps for money with no visible results. We have, across the board, a pension and benefits scheme for public workers which is wholly out of kilter with the private sector (with few exceptions depending on your position) and we have a private sector that will be called on in ever greater amounts to pay for this.

We are developing a 'Ruling Class' of bureaucrats akin to the latter day Soviet Union which makes sure those who are employed by the state are more protected in terms of job security, money, expenses, pension and the law than the rest of society who are at the grunt end of generating the GDP. The similarity is beginning to grate on me - privileged jobs with spanking benefits and allowances, international travel for fact finds, expense fiddling goes unpunished and peers who transgress the law are treated better than everyone else.

The picture of modern day Britain is far from the 'Cool Britannia' we were promised unless you are employed by the State.

The Green Shoots

The Centre for Economic and Business Research (CEBR) tells us that the VAT cuts have actually boosted our economy with over £2.1 billion of increased sales since 1 December 2008. It argues that the 2.5% cut which is due to expire in January 2010 should be extended for 6 months. The CEBR argues that annual growth in retail sales was higher than expected and this can only be attributed to the VAT decrease.

If, like me, you have consciously reviewed your finances and selectively decreased your spend then the rise comes as a bit of a shock. As a small businessman, I can certainly say that the VAT decrease has no effect on my sales at all while I have cut back on unessential purchases. I would expect in the business-to-business sector this is exclusively the case - VAT is just a money collection service on behalf of the Government for small businesses, in fact due to companies extending payment terms unilaterally, I have had to fund VAT payments through the business cashflow in the last quarter - it has actually cost me more.

The CEBR findings don't seem to fit the observations of most who are experiencing this recession, unless those who are losing their jobs are actually spending more.

Of course, such effects may be short lived. The Government plan was to actually raise VAT to 20% and it has an upper window of 25% allowable by the European Union. Will they use the full scale of charging for the future?

Well someone has to pay for all those public service expense accounts and pensions. As anyone would tell you in the Private Sector, there is no such thing as a free lunch.

Another Day In Paradise

I was heartened to see that several people who listened in to BBC Radio's Today Program were offended by John Humphry's badgering of 'Two-Home' Secretary, Jaqui Smith. Some thought that the whole issue was just about claiming for two £7 films erroneously while others sought to blame her 'employee' husband who managed the administration of her expenses.

I was more despondent that people don't seem to think this issue is about the fact she designated her primary residence as a back bedroom in her sister's house and therefore claimed her second residence, and all the £116,000 of allowances, to pay for her 'secondary', but family, home.

If we don't get that then we may as well assume that all MPs are claiming exactly the right amounts and not worry about the conning, fraud and wastage. After all, we are paying for it so if we like it - fine. I, personally, have a problem with the rotten lot of them from Conway downwards - the word 'crooks' is too good for them. How we could allow such people to have power in this country is beyond me - we may as well ask benefit fraudsters to run the country, it is the same issue.

RBS Shame Continues

Today, RBS, that wonderful investment of ours, announced the shedding of 9,000 jobs all in the back room 'Group Manufacturing' function. These are the medium waged workers who have been at the heart of the cost cutting regime that made RBS one of the most 'profitable' banks in its heyday. And I am talking real profits here as these are the people who squeezed suppliers, looked for operating efficiencies and harmonised contracts for all subsidiaries to get the best savings. The sort of people who actually were the backbone of RBS' expansion strategy that made it all work, in true 'Fred the Shred' fashion.

It is noticeable that none of the people who made false profits and then massive losses, whose salaries are each worth several of the backroom people's costs without including the bonuses they so avidly pursue even when they have broken the bank, were included in the job losses.

The £16m top up to Sir Fred's pension would have gone some way to saving a lot of those jobs but that was never on the minds of the likes of McKillip, Scott, Lord Myners or UKFI.

Gaps in the Numbers

The Institute for Fiscal Studies (IFS) told us that the Government are around £39bn out on their calculations on the budget deficit. This is not quite our what good mate, Alistair Darling, has admitted to but we are getting a little punch drunk on big numbers right now. We see so many huge numbers pass by our eyes each day that we have all long lost the ability to tot up just how much we will owe in the future on taxes. The IFS warned that national debt would hit 73.5% of national income by 2015/16 or 82.4% if the bail outs were fully accounted for.

It was a day to give you just a few more reasons to question why you pay your taxes and why we suffer living in a country like this.

Bank Bail Outs - The Guessing Game

As the world's intelligentsia stay on for the World Economic Forum in Davos, we get more of a picture that the global financial bail outs are not much more than guessing games.

'No Clear Map'

Perhaps for the first time, Gordon Brown, admitted that there was 'No Clear Map' for this crisis, but he was swift to defend himself by saying this was the 'first financial crisis of the global age' and therefore there was no historical precedent for tackling it. It comes as cold comfort to taxpayers generally who really look to senior Politicians and their vast rafts of economic advisers to be showing not just leadership but knowledge of how to solve these problems, particularly when such vast sums of money are at stake.

I do not think I am alone in saying that when a Government throws £900bn of money we do not actually have at a problem of this magnitude, you would like to think that either they know what they are doing or they can be accountable for every penny.

It seems Brown is getting his excuses in early, after the first bank bail out did not work and the second seems to be just good money thrown after bad.

At the same Forum, John Monks, General Secretary for the European Trade Union Confederation, told the audience that Governments were, 'close to straining the patience of the public and voters'. I am glad to hear that there is someone in a significant position who is standing up and saying this.

Use of Money

It comes as further cold comfort that newly elected US President, Barack Obama, who is not attending the Forum, is concerned that much of the monies used in the bail out is actually going to fund bonuses for banks. He seemed shocked that some $18bn had been paid to New York bank executives for performance last year SINCE the start of the crisis and the subsequent bail outs. He criticised these executives heavily for such use of the money particularly when the world's eyes are upon the outcome and more importantly US taxpayers are funding the liability for bank excesses which caused the situation. He even had to step in to cancel Citigroup's $50m private jet order as executives there did not seem to have enough morals to work out it was not the time for corporate toys having laid off over 70,000 staff as a response to the crisis.

Bankers Solving Problems

It really comes back to central point I have been making. The crisis, and I think there is a global consensus here, was caused by the over-zealous money-making activities of banks which went unregulated and unchecked. Now, Governments are turning to the very same people to try and plot their ways out of the incredible mess they created - poachers turned gamekeepers.

I have a fundamental problem with this. Yes, I agree that credit, capital raising and lending fuel business and the economy and this is fundamental to the solution, but I do not believe that bankers have all the answers to the problems.

Here are some obvious outcomes that we see - $5 trillion globally has been put up to solve the problem yet there was zero caveat for any bank to stop paying bonuses, the absolute very heart of why the situation got as bad as it did. It almost is too stupid to think about and anyone with a mere thread of moral fabric would have had the sense to have made any bail out contingent on no bonuses.

But this is what you get when you ask bankers to solve the problems - they will tell you that you NEED to have this money-making hunger in the system in order to start up the engine again as it is essential 'oil to the machine'.

That Barack Obama is upset by this is indicative that the last President allowed banking executives to lead his thinking, led by former Goldman Sachs CEO, Hank Paulson. The heads of the Feds have similar problems. In the last week or so, a company bearing the Paulson name but we understand is not connected to Hank, made £90m shorting RBS shares.

Here's the rub - on the Board of Directors of this Hedge Fund is none other that Dr. Alan Greenspan - yes, the very man who dictated US Fiscal Policy for so long.

It comes as no surprise that after 10 years at the top of Government, driving policies that made a thin percentage of the world's population rich beyond all comprehension, that Tony Blair is rewarded with a £1.5m per year Non-Executive Directorship at Morgan Stanley to advise on 'Globalisation' - the very subject that Gordon Brown says we don't have enough experience on.

Breaking Links

It is way, way too common to see senior career Politicians and Civil Servants getting involved with banks, watchdogs, lobby groups and consultancies whose very purpose is to exploit their current or future positions. It is at the heart of the problems we have seen in the House of Lords recently which came as no surprise to the public just as the whole sordid Deripaska affair seems to slip by the moral attention of Government. It seems it goes with the job.

The bank bail outs are sums of monies far outside the understanding of common people yet we know that these bail outs are the supposed salvation of our way of life. So it is not too much to ask for that when such incredible amounts of money are spent it is a) done with our best interests at heart b) that none of the money is paid to any individual for bonus purposes and c) that the people who make the decisions are held accountable for every single penny.

Legacy

The legacy of these bails out, and there are likely to be more yet, is that the UK debt burden will last around 20 years according to the independent Institute for Fiscal Studies (IFS). Gordon Brown may scoff at such numbers but there is enough intelligent, independent thought that questions much of the global response to the crisis. Joseph Stiglitz, the Nobel Laureate for Economics, at the Forum has said that creating a Bad Bank is just 'Good money chasing after bad', labelling it 'cash for trash' and would leave economies picking up the bill for years of excess lending by the banks, depriving spending on other social needs.

So while Gordon Brown tells us blandly that he has no real idea how this crisis will pan out and be solved and he commits more and more cash to the whole business on our behalf, while others in the world have actually challenged the thinking so that the legacy to the world's taxpayers might actually be more manageable.

While taking the bad debt out of the system theoretically sidelines the problem so banks can again lend more freely is one way to solve the problem, it does mean that all that toxic debt is to be paid for by the taxpayers. There is zero long term clawback of bank future profits other than some kind of insurance premium to pay it back. It is 100% assumed the public will pick up the tab.

So I ask one question - what is going to stop banks doing all it again? For all the 'New World Order' and increased regulations promised, we did not even have enough sense to stop any bail out money being used as bonuses.