Is Britain Becoming a Nation of Bureaucrats?

One of the biggest growth areas in the last 15 years has been the rise in the number of jobs in the Public Sector. In fact, the Office of the Deputy Prime Minister never existed before the last Government and now it is one of the largest departments in the firmament of 'Big Bureaucracy'.

It was fashionable to spend more money in those booms days on frivolous red tape and many argued that there was a salary gap between private and public sector that had to be closed. It didn't just close - the kinds of salaries earned in the Public Sector, and then add in fine pension schemes, are fast getting ahead of the Private Sector.

In fact, this morning's story that in Wales the Public Sector wages are now around 18% higher than in the Private Sector is shocking news. It means that the Private Sector is finding it hard to compete in terms of salaries which means that Wales is staring down the barrel of becoming a haven for bureaucrats while innovation, entrepreneurship and business creativity will be stifled because people cannot afford to take Private Sector jobs. It also means that if there is an austerity package meaning Public Sector jobs and pay decreases then the Welsh economy gets hit disproportionally harder.

It's a fast turnaround. Some years ago, thanks to the inbound stimulus of investment by the Welsh Development Agency, Wales was attracting far above its fair share of inward investment by Private business when compared to the rest of Europe. 

It's a sad state when good experienced business people take Public Sector jobs in the middle or end of their career to get high salaries and pension benefits rather than keep the innovation going in business - where the economy can really get stimulated. But that's the reality. If you want to be an Interim Manager/Practitioner, Public Sector pays far more on a daily rate than Private Sector (Oil business excepted). If you want to be an IT consultant, the Public Sector have plentiful openings at great rates as they waste more and more money on useless, never ending contracts.

At one point in the Blair/Brown years, 1 in 4 jobs in Britain were in the Public Sector plus plenty of 'temporary' jobs and many more indirectly in support functions. The Public Sector accounts for, some say, as many as one third of the jobs in great Britain.

It's little wonder that our economy is struggling under that burden of payments but more importantly, how many of the people employed in these 'more secure' jobs could be contributing vibrantly to the Private Sector to help stimulate real growth?

Today, MPs will vote to pass the new High Speed Rail link that first goes to Birmingham costing around £32billion. While the Construction Sector will get great benefits from this stimulus it doesn't seem to be the wisest way to spend money to spawn a massive new Public Sector monolith to cost, administer and manage the project which will inevitably over-run and cost far more than originally intended - you can already write the book on it. And is a rail link to Birmingham the highest priority on stimulating the economy? You get the feeling that investing even a 10th of that into technology and construction of schools would be far better for the long term.

But that isn't what the City wants. £32billion will be split nicely between the construction companies and the banks to make this happen while a big proportion will be to fund the red tape around it. Good business all round.

And one of the biggest issues of a more attractive Public Sector over a Private Sector is not only that the tax burden on funding the jobs goes up but also the long term accrual for the pension deals also rise. For every one job created in the Public Sector around two could be created in the Private Sector (I can't prove that but it wouldn't surprise me).

Public Sector employees work in the same jobs longer, stifling the future for our young and it will mean ultimately that Britain becomes less competitive as it becomes just a sprawling, unimaginative bureaucracy supporting the Finance Sector.

Maybe that's our future. We are so good at administration that we become the new Offshore Outsourcing Centre for all of Europe's Civil Services. Lord knows, we are good at it.

Pity we didn't put so much time, effort and investment in encouraging Private business and entrepreneurship.

The Curse of Low Interest Rates

The Bank of England's Monetary Committee was this week split but Interest Rates have again been held at record low levels of just 0.5%. Surely this is good news for us all and the economic recovery?

The reality is that there is a ticking bomb in the system as those people who either are already on standard variable rate (SVR) mortgages or are due to be on them soon, have a nasty shock in store. The fact is that interest rates will rise - it's just a matter of when not if. SVR today is from 3.5% to 4.95% and many people have budgeted the affordability of their mortgage and lifestyle based on this rate. If base interest rates should raise by just 1%, then it would constitute as much as a 29%% rise in SVR and, therefore, repayments which is a huge increase. And let's face it, given past SVR levels, a 1% rise is trivial.

The saviour for people in this predicament in the past was to grab a fixed rate mortgage around now and lock themselves down on repayments. But the problem is that new fixed rate offers are factoring in what banks think will happen to interest rates and in many instances these deals are unaffordable already for people on SVR. There is a ticking bomb in terms of potential repossessions in the future.

The indicators in the economy are not good. The retail sector is suffering as 4%+ inflation rates hit. Jane Norman, Thorntons, TJ Hughes, Carpet Right, Habitat amongst others have suffered terminally in a raft retail of bad news. And only part of this can blame the internet changing buying habits or out of town shopping growth. You can tell when it gets tough when affluent London commuter towns like St Albans have boarded up shops in the High Street and Poundworld is the most thriving shop. Consumers are already reining in their credit exposure and spending. The news gets worse as only yesterday British Gas spoke of yet another hike in gas prices of around 20% as a strong possibility and we already are seeing upward pressure on food costs.

The fact is that inflation figures are misleading. The real inflation rate amongst people with average or lower disposable incomes is actually much higher as those goods which are increasing in price faster represent a higher proportion of average spend to these people as it may do to richer people. The rising cost of energy hits average incomes much harder than higher incomes as these people may spend the same on energy but it is less of a proportion of their average spend than lower paid people.

And today, Public Sector workers are striking over austerity measures which threaten their pensions which are gold plated compared to the real world of the Private Sector. But here's another reality. The Government does not invest lump sums over the long term 'saving and investing' to pay for Public Sector pensions, they actually come out of the current account paid for by National Insurance. So Public Sector pensions are paid directly out of our taxes, there is no magic fund or annuity to pay this. You and I, everyone, pays for Public Sector pensions directly in our tax bills today - and this is only going to get higher. So while in the Private Sector we have a crisis looming in terms of retirement income, we are paying for the gold plated, premium Public Sector pensions in our tax.

And the Public Sector workers think we will support their strike? They must be joking.

So people stuck on SVR mortgages have it in all directions - higher interest repayments to come, more taxes to pay for Public Sector pensions and the like and higher inflation on staple goods. It's not a pretty place to be. Add in greater uncertainty on jobs, particularly in the banking and retail sectors and the picture is very gloomy.

In many respects, the damage caused by the economic disasters in the financial sector has yet to really bite. The next 24 months could see some very tough times and a band of people are right in the firing line. By keeping the interest rates low to kick start the housing market, many people who got new mortgages based their affordability assumptions based on lower interest rates continuing.

This is the curse of low interest rates.

Layer Upon Layer

I recently took part in a survey of what things I felt could be done to help Britain reduce its borrowing. Hold your horses - it was neither the front bar of a pub nor was it in the corridors of power. It was an online thing in one of the networks I use.

So the results are hardly likely to go anywhere. However, I have to say that some of the thoughts seem to resonate with those of others and the broad consensus of agreement is that there were many, many ways for the country to save money and reduce borrowing long before we actually impact services.

The first and most obvious way to reduce costs is simply to look at the layers of structure that exist both within public service departments and Government itself. Over 1 in 4 jobs are now in the public sector and this is warning enough. But when you start looking at the complex web of management structures and communication bridges, quangos and the like you suddenly get very depressed at the level and competence of the people that must be in there. Yet not a day goes past when some advert comes out for an overpaid interim to run some NHS Trust. We are breeding terrible grounds for long term bureaucratic money sumps.

So a starting point would be to review how many people we need in Parliament, the number of people to support these and start cascading the process. Very quickly we could home in on the number of MPs, the flunkies and mandarins, then the level of Local Councillors required, their staff and amorphous bodies around them, National Assemblies and their associated costs. Vast sums could be saved on the multiple layers of politician and the associated support infrastructure and people in pretty short order. Then we start looking at the departments around them and critically analyse who does what and why - the old time and motion study on public servants would bring into stark focus why Departments have spawned their own empires and management structures - Business Secretary alone has 9 junior ministers and umpteen staff - it's bizarre.

Don't start me on quangos and ancillary 'private' companies like the FSA or similar - vast staff who have proven they do nothing and cost loads. There are thousands of them, all stocked with the highest paid clever-clogs and never sensibly priced workers. It's all jobs for the boys and none deliver real value.

Associated with this is the whole costs associated with public service. In Wales and Scotland whole new prestige buildings were erected to house new assemblies when there were oceans of office space going begging - the costs, the salaries, the expenses so much of it unregulated. Then you start to look at the 'hangers on' - how many of these offices have associated external advisers, consultants, PR agents and the like running around on vast retainers adding little value to the everyday business process and our lives. Value for money is the key issue - it's not about making politicians or civil servants' lives easier it is about getting value for taxpayers' money. First to get the chop would be the army of investment bankers and lawyers advising on the current economic crisis - nearly £100m on them alone per year.

Then we could start looking at the layers of management in each department. Having experienced the NHS at first hand in the last few months, it is absolutely clear that money is not being focused in the right area. I have no qualms with the services provided, but when consultants have to beg for the prescription pad to administrators you know there is something wrong. The layers of management in such organisations are dreadful and unnecessary. The first thing these people would do is call in advisers to look at structures when in fact this is what private business does all the time. Management reviews are an everyday occurrence in business and if that's what the NHS is meant to be, then the managers should be capable and tough enough to do it. The amount of cash it could free up in the largest public budget is enormous.

Coupled with this is the vast wastage of money associated with budget overruns or badly implemented projects. It is not rocket science but you see £billions wasted on overly complicated IT and data projects, emergency service automation projects and the like. And so much focused in Police projects on how to balance budgets through revenue collection rather than focus on crimes. Value for money is the mantra here.

And again coupled to all this is the potential savings in salaries and costs associated with reviews. But it should go deeper. There is also recession on and wage negotiations have to be tough and tightly controlled while the whole bonanza on public sector pensions has to tackled before it cripples us completely. Why public service has such bias in terms of pay and conditions is beyond most people in the private sector who would kill for such fantastic automatic pay increments and pension schemes.

The target system is these departments is just a mess. While checking in waiting times may have gone down at the NHS, the chances of getting treatment quickly is minimal and highly trained people are focused on the simplest of tasks as they help hit targets. As we all know, hitting targets means money so more can be spent to hit the next targets which move you ever further from proper value for money. The whole service of Government is becoming a postcode lottery as incompetence seems to breed in certain areas.

Education is costing more and more and delivering less. How Ed Balls can smile is beyond me when you look at the basic deficiencies of entrants into the business world. They can text nicely on a phone but using written English defeats them while basic maths skills are beyond them. Looking at exam results, then the message is that we are producing genii. We are loggerheads with reality and what is required for future generations.

It's a simple matter but layers of management are counterproductive - we in business know this. Looking in at the whole public sector and you see layer upon layer of unnecessary levels of management whose tasks are to aggregate communication for the next layer up - in today's world of advanced communication that delivers nothing and hinders plenty.

The problem stems back to the central control issue. The idea that a Government has to control everything means that you have a cascade principle at work. Only partly in that structure do you get any kind of devolved thinking and its why we get so little value for money. Services in general are less but cost more - just take a look at local refuse collection. The amount of refuse being taken is decreasing, we have to do more of the work as individuals than ever before in sorting and if we should break the rules we get a criminal record. yet do we see a decrease in cost? It's just crazy. More and more talk comes about direct taxation for specific roads or services and it makes you ask, 'Then what have I just paid for in taxes?'

Value for money should be the credo for all taxpayers. We should be able to ask how our money is spent in wars, services, education, health, bank bailouts and other areas - we want to know why we are funding more politicians than ever, why are we supporting such generous pension requirements for the public sector and why are we paying for so many external bodies who deliver zero value?

All that happens instead is we sell off £16bn of assets no one cares about. It's a drop in the ocean in terms of what is required. Governing this country and delivering service has been an enormous sponge to cash over the last 12 years and no one knows how much we get back for the money we spend. It's time that rigorous reviews are done and savings identified fast. The IOD reckons at least £50bn per year can be saved on annual expenditure without cuts in services and I think they are undercalling it.

Waiting for the election will not help deliver the necessary savings in time. It needs to start now.

The Pension Game

A report by PriceWaterhouse suggests that the public sector has a very generous pension scheme. Well that was money well spent to find that out.

However, it isn't as simple as it seems. The average annual retirement income for an NHS worker is only £6,500 and the average local government worker gets around £3,800. The reality of all pensions is that only 4% of the retiring population get the nirvana of two thirds of their final salary income when they retire. That's because most people do not stay in a single job long enough, even in a final salary scheme, to qualify for full benefits. The vast majority either change jobs or enter public service late or leave early. So PWC's assertion that is causing a block to talent moving from the public to private sector and vice versa is a myth. You have only to look at some of the salaries on offer in public service jobs to understand that they are very generous pay packets to be earned as well. True, below management grade the salaries are lower but when you look at the incredible pension scheme, the draw to public sector can be strong. Private business salaries do tend to be higher and this keeps the lure of this sector going but that is because Britain has become a society of low savings and even lower planning for the future - we are a live-for-today society.

It is believed that as much as 35% of salary contribution would be required to match the generous public sector pensions for private sector workers - that is because they are back-ended. We accrue on average 6% of our salary at any time to toward our pension but our salaries grow and we pay the higher contributions for a proportionally shorter period and that is why we have huge shortfalls on what is required to live on even if we are diligent savers. In the public sector, this disparity is taken care of by the generosity of the taxpayer - we pay disproportionally more for public sector pensions than the pensioners themselves. That's a simple fact. In other words, we probably pay as much to fund other people's generous pensions as we do for our own over the course of our careers - you would have to check the sums but it cannot be far off the truth with nearly 1 in 4 jobs in the public sector.

There has been controversy lately as companies like Barclays and especially RBS have cut the payouts from their pension schemes after culling staff in the wake of the financial crisis. For RBS workers, it was particularly galling after the fabulous payout and topping up of ex-CEO's Fred Goodwin's pension which he can draw early anyway. At Barclays it comes as a hard blow as staff have been cut and traders are again courting controversy with more bonus payments worth the pension saving in a single year while new teams of 'talent' arrive with amazing packages worth the salaries of hundreds of low end staff individually. It seems very curious that these companies are not saving cash on bonuses and putting it into pensions schemes or, indeed, why have they not been doing this in the past?

Pensions is a looming time bomb for us all and the Government. Our good friend Lord Turner found time between his many jobs to put his name to a report that someone else wrote, I dare say, as he has to earn multiple salaries, which urged pension reform in public service and a potential switch to average not final salaries as the basis for pension entitlement calculation, which would make sense. Pity he doesn't look at other problems with such diligence but as with many high level business people they are great at cost cutting but poor on working out how best to deal with profit as most of it goes to a very narrow band of people leaving little to be invested in pension funds for staff.

It is a question in the private sector that the Government tried to address with the pathetic implementation of the dreadfully poor and ill-thought out stakeholder scheme. It got us nowhere but hit the soundbite machine as usual. Reading Niall Ferguson's Ascent of Money, it shows how our Welfare System has been so badly thought out compared to even under developed nations in South America as we are the most highly insured nation in the world by individual cover yet we have so little benefits at the tail end. It seems the money just goes into a massive sump - much of which and more was consumed in the bail out frenzy but a great deal of which funds a very uneven balance toward the public sector remuneration.

There isn't a great deal of time to sort the issue out. This year the population grew to 61.4m in Britain and for the first time in a long while it was births which accounted for the growth rather than immigration as mothers gave birth, on average, slightly younger than usual to far more babies than the rate of deaths in the UK. The old are growing older.

The problem of pensions, benefits and, now, unemployment are issues which are right at the head of the agenda but no one can see it.