Facing Down The Unions

Impartial BBC journos off-duty

It's just like old times. The teachers are going on strike, the Post Office workers are going on strike, and even those most essential of essential workers, the BBC journalists are going on strike. The common theme? They're all employed by the public sector.

As you know, the public sector is the last bastion of British trade unionism: 60% of today's union members are employed in the sector, even though it contains only one-fifth of the workforce. And these unions will strike at the drop of a hat - even while Blair's government was busy ramping up their members' pay. 

Here's the latest version of a chart we've posted before. It shows the number of days lost to industrial action annually in the public and private sectors (the figures are rolling three year averages):

In the private sector, the number of days lost annually has fallen to around 100,000 pa, or roughly 0.004 days per employee. However, in the public sector it's running at 20 times that rate. Moreover, while private sector employees have stoically swallowed pay freezes and tougher working conditions since the Crash, public sector unions seem to think their members are entitled to same rewards as during the time of plenty. There is no acceptance that the world has changed, and hence this fresh wave of strikes.

Of course, the Coalition did impose that two year pay freeze, but as we blogged here, in reality that turned out to be a freeze in name only. Depending on how you measure it, pay increased by between 5 and 10% over the two years, and it's still increasing. Moreover, public employees are already paid getting on for 10% more than their private sector equivalents, on top of which they get those famous index-linked pensions that are simply not available elsewhere. As we estimated in the BOM book, the total reward gap could be as much as 30 to 40%. Even after recent pension reforms kick-in, it will still be well North of 20%. 

But credit where credit's due: the Coalition are certainly having a go at addressing the issue. They have reformed the public sector pension schemes to make them less generous, and although there's more to do, over time their reforms will save taxpayers some serious cash. 

And they are now tackling the issue of progression pay - the automatic annual pay increments received by a substantial proportion of public employees. Virtually unknown in the private sector, incremental scales deliver year-on-year pay rises irrespective of freezes or indeed individual performance. George says:

"We will seek substantial savings from what is called progression pay. These are the annual increases in the pay of some parts of the public sector. I think they are difficult to justify when others in the public sector, and millions more in the private sector, have seen pay frozen or even cut."

Quite right George (and yes, we do realise Chancellors have never enjoyed such increments, and you haven't had a pay rise for three years).

But it's going to be a helluva battle, with the teaching unions already launching an all-out assault on the Gove Line. The Association of Teachers and Lecturers passed a vote of no confidence in him and his Chief Inspector earlier this week, and the NUT is following suit. A protracted series of strikes looks well on the cards.

The Coalition must stay strong on this. Closing the public sector pay and pensions gap will ultimately save taxpayers at least £25bn pa. And although it will obviously be painful for public sector employees, they should understand it's a lot less painful than the Irish solution. There, public employees had to accept pay cuts averaging 15%.

PS Did anyone miss the BBC journos who went on strike last week? It should have encouraged more people to try out Sky News, and I suspect a good proportion will not return. A few more outages like that and even Mr Cam might start thinking about break-up and sale. Let's hope so. 

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Problems With The Roller

This may never turn into a Rolls Royce

Now don't laugh, but there used to be a theory that the Civil Service was a finely tuned Rolls Royce. Ministers had only to point it in their chosen direction, settle back in the plush leather seats, and leave the purring giant to convey them effortlessly down the road.

Of course, it was never actually like that in practice, but for politicians keen on expanding the scope and reach of government it was a useful and comforting myth. Attlee's New Jerusalem government reckoned Civil Servants were capable of managing everything from the commanding heights of the economy right through to the allocation of bedpans in their newly nationalised health service. Wilson's government pushed up the proportion of our economy under Whitehall management from 35% to 45%. And we all know what the Blair/Brown government did.

But if your base your approach on a myth you end up with a disaster. And far from settling back in the Connolly leather, ministers spend most of their time flat on their backs under the car wrestling with the transmission.

And this week we've got two very good examples.

First, the latest attempt by a Health Secretary to stop the dysfunctional NHS killing so many of us. The bureaucrats at the Department of Health having failed to come up with anything other than more paperwork, Jeremy Hunt is issuing his own Orders of the Day.

Order Number One. All hospitals and care homes will be officially rated by a the new Chief Inspector of Hospitals.

Order Number Two. Any state healthcare operative who fails to freely confess his own shortcomings will be shot. Well, maybe not shot exactly... but their employing organisation will be given a jolly good talking to.

Order Number Three. Before they qualify, all student nurses must spend a year... well, let's say "up to a year", actually doing some nursing with real patients.

Mmmm... no matter who's sitting in the big leather chair, the NHS just goes on fighting the Battle of Stalingrad. As we've blogged many times (eg here and here), running a huge organisation through top-down orders and fear may have worked for Stalin in 1942, but he wasn't trying to save lives (other than his own of course). In the NHS it's been a total flop: successive Health Secretaries have tried it, and it simply doesn't work.

As for the new Chief Inspector of Hospitals, he's only being introduced because Labour's Care Quality Commission has failed. And the Care Quality Commission itself was only introduced because its predecessor, the National Patient Safety Agency, also failed. A government regulator regulating a nationalised industry is always going to be the public sector marking its own homework. And while the Government Inspector may strike fear into the hearts of employees - witness the hatred of Ofsted among many headteachers - that's because the regulator becomes an instrument of Commissariat control rather than an objective assessor of standards.

And who ever thought it was good idea for nurses to qualify without having a hands-on apprenticeship of feeding and washing patients? When my Mum trained as a nurse back in a flagship pre-NHS hospital, one of  her duties was to make sure the patients in her care were eating and drinking properly: years later she still recalled being pulled up by matron for not cutting the crusts off some old boy's sandwiches. It was the Department of Health - miles away from the sharp-end of patient care - that later ruled that wasn't part of a nurse's duties.

Meanwhile our energetic Home Secretary has announced that she's breaking up Labour's useless £1.6bn pa UK Border Agency. The UKBA has become a byword for ineptitude, with among other things, an immigration case backlog well in excess of 300,000 cases.

According to Mrs May, creating this gigantic immigration super-quango may have looked neat on paper but in practice it was disastrous :

"First, the sheer size of the Agency means it has conflicting cultures, and all too often focuses on the crisis in hand at the expense of other important work. Second...UKBA was given agency status in order to keep its work at an arm’s length from ministers. That was wrong. It created a closed, secretive and defensive culture. The new entities will not have agency status and will sit in the Home Office, reporting to ministers."

This echoes two points we've long made on BOM - one, that bigger is almost always worse, and two, that delegating power to arms length quangos means rule by bodies unaccountable to anyone, let alone us poor schmucks out here paying for it all.

So good for Mrs May.

But not so good for Mr Hunt.

Because although both of them are attempting to fix the broken old jalopy of of Civil Service management, Mr Hunt ought to be trading it in for a superior model.

With border control Mrs May has little choice but to somehow get her Civil Servants working better: protecting our borders is an essential function of government, and she can't turn it over to others. She has to make it work, however hard that is.

But healthcare is something else entirely. It's not an essential function of government, and Hunt should be learning from the workings of superior systems elsewhere. The European Social Insurance systems put customers in charge via their freedom to choose between competing providers. In all likelihood their Civil Servants are no better than ours at running things, but it doesn't matter because they're not required to do so.

Unless we can shrink government back to its core functions we will never enjoy the standards of service we're already paying for. No matter how hard ministers may try, you simply can't build a Rolls Royce from the bits off an old Austin Allegro.

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Kudlow's Radio Interview with Jimmy Kemp

Kudlow: I was talking about Jack Kemp my mentor, the late Jack Kemp, the great Jack Kemp, my friend and mentor, and his great message of economic growth and opportunity for all.  I want to emphasize those last two words- for all.  Nobody, in my lifetime, in either party, has reached out with a message of hope, growth and opportunity to minorities better than Jack Kemp. And I want to bring in my pal, Jimmy Kemp, who runs the Jack Kemp Foundation because, Jimmy is now the keeper of the scrolls and he is also a great friend.  Jim, how are you buddy?

Kemp: I’m great Larry, how are you?

Kudlow: I’m okay uh you know, there’s some scattered, you see some scattered columns and websites that talk about where’s the Jack Kemp, the new Jack Kemp in the Republican Party but, it was Jack’s message- I gave a talk, it was very funny, I gave a talk to the Wall people, the Manhattan, New York Republican Party and I’ve done this a little bit on the Kudlow Report, we had a whole Jack Kemp segment two nights ago-

Kemp: I saw it.

Kudlow: Alright, what I remember, let’s put the tax cuts aside for a minute, as important as they are, what I remember, particularly when Jack was the Secretary of HUD, because I was one of his volunteer kitchen cabinet there; Jack wanted Empowerment Zones-

Kemp: Enterprise Zones.

Kudlow: Enterprise Zones, tax free Enterprise Zones-

Kemp: Not tax credits, but tax free, you’re right.

Kudlow: and as much home ownership as possible for minority groups.  Jack went to the projects, he actually went to the projects in Detroit, Chicago, L.A., and New York.  He worked with Charlie Rangel, the great, black Congressman in New York City and we developed what became Empowerment Zones here in New York City.  My wife’s art studio is in one, I mean am I wrong here?  Is my memory betraying me?

Kemp: No, no of course not and part of what Dad understood is that- good policy, as great as Kemp-Roth was at cutting tax rates at that time, which was, reflecting on it, it was obvious tax rates were confiscatory. You couldn’t have them that high and have a growing economy. But he also knew at the same time, back in the 70’s, way before he was at H.U.D., but in order to have good policy it can only be policy that can be passed and in order to pass it he had to get Democrats. Larry, he was a Republican in a Democrat controlled House of Representatives and yet they had President Reagan in 1980, but he had to convince people, like Charlie Rangel, that he really did care. And that these policies that were “conservative,” he liked to call them liberal, because they were intended to free people to provide equal opportunity and knew that tax rates went along with providing that equality of opportunity in the housing sector, for people starting businesses in ghettos or barrios or poor urban areas, wherever they were. He knew that capitalism without capital is nothing but an ism, as Jesse Jackson had said and you had to get capital to people who would do something with it. He trusted people, and, as you pointed out, all people, not just rich folks who went to good schools.

Kudlow: See that’s the thing. Now the Republican Party is, some people in the Republican Party are trying to open up immigration reform. I’m all for it. Your dad believed that immigrants were a positive force.

Kemp: E pluribus unum.

Kudlow: Right. He would have been on the right side of that issue today. But, you know, Jimmy, It’s just like reaching out and saying okay we’re going to give you a green card, that’s not really the answer. I mean what I’m saying is Jack Kemp had a set of policies, besides low tax rates, he had ownership policies, he had empowerment policies, he had, let’s see, no capital gains tax if you moved a business into an Empowerment  Zone, which would attract capital and people. There was human capital and financial capital. Kemp visited the projects, I want to emphasize it, Kemp met with La Raza Hispanics. Kemp visited the projects. When we were negotiating back in , I don’t know when this was Jimmy, 1991, Jack sent me to a couple of meetings with La Raza with his Rep. to try to figure out how to get a zero capital gains tax and La Raza backed it. They actually backed it. Now, Republicans don’t do that anymore. They don’t show up in the projects, they don’t go to a La Raza meeting, they don’t get photographed with Hispanic leaders and black leaders anymore. That was stuff Kemp did, it was great stuff. Why doesn’t anybody do that now, follow his example

Kemp: Well, the greatest example and a guy we all love and respect, Paul Ryan, who worked for Dad. H made the calculated decision to focus on our incredible budget deficit and the spending that was out of control in the entitlement programs and led, Larry as you know, it took him away from the main thrust of Dad’s career. And there isn’t anybody who has jumped into that, really opportunity, the way that Dad took the reins, and there are a lot of great leaders today. I’m not discouraged. Part of our purpose at the Kemp Foundation is to help support or political leaders and we’re certainly not pessimistic because we certainly couldn’t have the name Kemp associated with us if we were. You’ve got governors who are doing the right thing, you’ve got plenty of congressmen and senators, but we do need a more robust discussion of the components of an economic policy because there should never be any discussion of a new normal, I know you hate that phrase. This country has too much capability and abilities, not only in the board rooms, but in classrooms around the country.

Kudlow: Growth should be unlimited. Just to reset the table, we’re talking to Jimmy
Kemp who is the president of the Jack Kemp Foundation. I am holding up, you see these stories about Jack Kemp, one story was written, “We need entrepreneurs like Jack Kemp.” Okay, I’m fine with that, but I don’t want to miss the essential point here, the essential point; Jack’s goal was growth, in other words, if you grew the economy rapidly through lower tax rates, less regulation and sound money, if you grew the economy that was a weapon to shrink the budget deficit and the debt. That was Jack’s way out. That didn’t mean he’d vote for spending bills that were unnecessary, but he understood that debt to GDP, that Republicans obsess about all the time, you solve that, in some sense, by growing the GDP.

Kemp: Sure, you want a bigger pie.

Kudlow: Bigger pie! And secondly, with the debate about so called Republican outreach to minorities look at what Kemp did. Kemp didn’t do it just to win votes, he had a program. Let’s go through it again, it was home ownership, it was enterprise zones, it was tax-free enterprise zones. He would go to the meetings and the rallies and meet with the leadership. He already showed the way. What we need is a Kemp biography here to let people read this stuff and that’s what he did, he was a one-man band. Some Republicans made fun of him, the country club crowd made fun of him, Jimmy, but we should follow his lead now.

Kemp: Well, yeah, the Kemp Foundation has a biography in the works and then we’re also releasing, in 2013, all of his speeches, which were previously released in a volume called the American Idea. And American Renaissance, we’re going to put out as well. The American Idea will have all of the speeches that were in it previously, but a bunch added to it.

Kudlow: Who’s doing the biography Jimmy? We only have 25 seconds. Who’s doing the Biography Jimmy?

Kemp: We’ve got Mort Kondracke and Fred Barnes working on it.

Kudlow: I did the oral history. I want to see that. I want to work on that biography.

Kemp: Alright.

Kudlow: Jimmy Kemp, president of the Jack Kemp Foundation. That was Jack Kemp’s message, hope and opportunity for everybody, including minorities. I’m Larry Kudlow and we’ll be back with some budget talk on the other side of the break.

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One-on-One with Dr. Ben Carson

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Plan B Kicks Off

Get used to this

So here we are with a government spending far more than it can raise in revenue, building up a catastrophic pile of debt, and facing an election in just two years time. Spending cuts are needed to balance the books, but more cuts this close to an election just ain't gonna happen. What on earth can be done? George is prepping Plan B.

George's Plan A is to pray for growth, and in both the 80s and 90s it was a resurgence of growth that came to the fiscal rescue. Unfortunately, with debt overhangs and busted banks all around us, we're now in a much more difficult position than we were back then. The growth rescue looks to be way off, and George knows it.

Which is why he's now busily working on Plan B. It's the traditional plan for over-borrowed governments everywhere, and its ingredients are as follows:

1. Engineer higher inflation by printing money - in an open economy like the UK it's quite easy because currency depreciation soon gets prices moving up.
2. Fail to index tax thresholds in line with higher prices - that boosts income tax revenues as earnings respond to higher prices (aka fiscal drag), adding to the higher revenues flowing from VAT. 
3. Limit spending in cash terms- hold spending departments to strict cash limits.

Over the last several months, George has taken action on all three components.

First, he confirmed in the Budget that under his new flexible friend Governor, the Bank of England will no longer be restricted to a 2% inflation target. In future, it will be allowed to set itself "intermediate thresholds", such as keeping "interest rates low while unemployment is high, provided inflation is not expected to rise too much". How much inflation is too much? That's for him and the Governor to choose, and you to fret about as you watch your savings disappear down the plughole.

Second, he's increasing the higher rate income tax threshold by only one percent a year, even though inflation is running much higher. The £150,000 threshold at which the top rate of income tax applies is frozen altogether, as is the £100,000 threshold above which the personal allowance starts being clawed back. The higher is inflation, the more harshly these measures will bite, with around half a million additional taxpayers being dragged into higher rate tax over the next two years. Similarly, the threshold for Inheritance Tax has been frozen at £325,000 since 2009.

Third, he announced in the Budget a huge increase in the scope of departmental cash limits. He said:

"The public spending framework introduced by the previous government divided government spending into two halves: fixed departmental budgets and what is called Annually Managed Expenditure. Except in practice it was annually unmanaged expenditure – and it includes almost the entire welfare budget as well as items like debt interest and payments to the EU.  

We will now introduce a new limit on a significant proportion of Annually Managed Expenditure. It will be set out in a way that allows the automatic stabilisers to operate – but will bring real control to areas of public spending that had been out of control."

Exactly how it's going to work is unknown, but the intention is clear enough. And it promises a revolution in the way that welfare spending is controlled. Because instead of pre-committing to pay whatever bill the agreed rates of welfare benefit generate, he's saying the total amount will be cash limited. Benefit rates and entitlement rules will have to be flexed to fit within a cash ceiling, and that will have to include upratings to cover inflation.

As for debt, higher inflation will obviously erode the real value of government obligations fixed in cash terms, notably its issues of so-called conventional gilts. True, its index-linked gilts will have to be adjusted in line with the higher inflation, but since they only comprise one-quarter of total gilt issues, the Chancellor comes out well ahead.

Of course, there is a serious risk that what he gains on the debt erosion swings he will lose on the debt interest roundabouts. If the markets lose confidence, as they did when a similar scam was tried back in the 1970s, interest rates on new gilt issues will shoot up and debt servicing costs will take off. Even so, because the existing stock of debt has such a long average maturity, it will take a couple of decades before the full impact is felt.

So that's Plan B. And it's worth noting what the world's most successful central bank ever has to say about it:

"Government debt fosters the risk of inflation. Central banks, too, are usually exposed to the strong pressure that burdens states with high levels of debt. This is because the higher the pressure on the government to get the public debt under control, the greater is the temptation to exert pressure on the central bank to lower interest rates via monetary policy measures... 

If, in order to safeguard its solvency, the government pressures the central bank to set a lower interest rate than is compatible with price stability, demand increases too quickly, and this ultimately leads to higher inflation. In this case economists speak of a regime of fiscal dominance: interest rates are no longer set according to the requirements of price stability but instead are dictated by the state’s need to reduce its financing costs. 

Measures taken by central banks in the past, under the influence or control of the state, to lower interest costs or to reduce the overall debt burden, have ranged from straightforward interest rate reductions to purchasing government bonds in secondary markets and to direct monetisation of government debt.  

To be able to resist this political pressure, central banks have traditionally been granted a high degree of independence. This was, among other things, a response to the experiences of the 1970s and 1980s. This era of oil price shocks posed a major challenge to monetary policy-makers. It became apparent that countries with independent central banks had much lower inflation rates – and similar or even higher growth – than countries whose central bank was answerable to the government.  

Central bank independence is therefore essential to inspire confidence that the central bank will keep inflation low. However, a high government debt burden can generate doubts about its actual independence and undermine its credibility, even if it has not actually changed its monetary policy course. Once doubts arise about of the monetary policymakers’ capability to defend their independence against political interference, they risk losing control of inflation expectations and thus over inflation itself."

That's the Deutsche Bundesbank speaking - the rock-solid guardian of German economic stability right up to   when the Germans were bounced into the Euro.

My advice? Get down to the building society, draw out all your cash, and get yourself some of these:

Yes, I know - easier said than done. Personally I'm going to contact the Major's old mucker Mr Gomulka who apparently has a lock-up full of them.

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It's Who You Know, Not What You Know That Matters.

Google Reader was like TiVo for the web, appealing to completists and skippers alike. Read everything or read nothing. The choice was yours.

Jason Shellen - founding product manager of Google Reader writing in Techcrunch on March 23 2013

RSS:Really Simply Stated - It's TIVO For Blogs.

An irrelevant blogger writing on October 1 2006

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Another Slice Of Salami Sir?

Glad someone's enjoying this

Long-time readers will know that the 2012 Olympics smashed the world record for salami slicing (see all 2012 posts gathered here).

The first slice - served up when we originally pitched for the thing - was a mere £2.375bn. But after landing the gig, the cost suddenly ramped up to £9.3bn, a fourfold increase. We later discovered the original costing had been cobbled together during a late night Withnail drinking contest down The Stoat and Weasel, but the process bore all the classic grease-marks of ripe salami. That's where project costs are deliberately low-balled so as not to scare taxpayers. One international study found that 90% of such projects overrun their initial budgets:

'The study concluded that lying, or intentional deception, by public officials was the source of the problem: “Project promoters routinely ignore, hide, or otherwise leave out important project costs and risks in order to make total costs appear low.” Politicians use “salami tactics” whereby costs are only revealed to taxpayers one slice at a time in the hope that the project is too far along when true costs are revealed to turn back.'

And in the case of the Olympics, the slices are still being piled on our plate months after the wretched thing ended. So yesterday we learned that taxpayers are being forced to shell out another £150bn - £190bn to convert the white elephant Olympic Stadium into a football ground for West Ham. Well, OK, £15m of that will come form West Ham, but for that we're giving them a £600m+ stadium.

It really does make you want to spit, even if Boris reckons it's the best deal available in the circs. Because if the arrogant Tessers originally in charge of the project had ensured the stadium could be used for football, we wouldn't now need to swallow this additional slice. Even a non-sporty potato like me understands that football is the only sport that could sustain such a monster, yet that point was clearly beyond Her Ladyship Tessa J. Even though her own Sports Minister says he explained it to her:

"The mistake was made in 2006/7 when they ruled football out of a retro-fit design as we had done successfully in Manchester with the Commonwealth Games stadium. I suggested retractable seating like the Stade de France in Paris but they insisted it should be a 25,000-seat athletics stadium. Time and again mistakes are made with Olympic Stadiums and the lessons should be learned for any future similar projects."

Lessons being learned for the future.

If our high spending politicos could learn lessons for the future, I doubt I'd be writing this blog. Value for our money never trumps political grandstanding, and grandiose projects like the Olympics offer the most imposing grandstands of all.

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Can Cyprus Still Sink Stocks?

Say that title fast five times, lol.  The markets are higher this morning despite continued uncertainty in the Cyprus situation.  Officials are trying to put something together to avoid a collapse of the country's two largest banks.  There has been some chatter than a large Greek bank might step in. 

Eurozone officials are also discussing plans for imposing capital controls in order to prevent a run on the banks when they reopen.  This comes as the ECB has threatened to stop providing Cyprus with emergency liquidity support as early as Monday.

Despite the fluid situation there, stocks are higher again this morning, continuing the stairstep pattern we have been writing about.  Retailers are strong this morning after solid earnings reports from Tiffany and Nike (NKE), with the latter stock spiking to new highs.  On the disappointing side, Tibco (TIBX) is down -15% after missing on revenues and lowering guidance.

Asian markets were mostly lower overnight, possibly due to Cyprus worries.  But Europe is mixed to higher so far today.  We expect new on Cyprus to continue hitting the headlines.

The 10-year yield is flat near 1.93%.  The dollar index is lower, but so is gold (near $1608).  Oil prices are up a bit around $93.00.  And the volatility index is down another 3% to 13.50.

Trading comment: The market bent again yesterday but has refused to break.  As I mentioned earlier this week, the longer the S&P 500 chops around in a sideways fashion and consolidates its recent gains, the more likely it is that we see another breakout to new highs.  And when the SPX breaks to new all-time highs (1575) expect the media to glom onto it again and run all sorts of stories about "are we in a new bull market?".

KAM Advisors has long positions in NKE

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The Overspend Gets Bigger

See you at the airport

So what do we make of the budget?

Given his starting point, George did a reasonable juggling job, and managed to sound as if he's serious about getting the economy moving again. His moves on company taxation and fuel duty are welcome, if relatively small... er... beer. His fresh attempt to inject life into the housing market is also potentially helpful, although we need to see more detail before we can be sure it won't simply re-inflate the property bubble and/or expose taxpayers to a huge Freddie and Fannie style default crisis. 

However, looking at the big picture, he failed once again to tackle the rampaging elephant that's still smashing up the fiscal room. That is, he did nothing to bring government spending back down into line with sustainable tax revenues.

Yesterday I took part in a TPA/IEA panel discussion on the budget, and the excessive level of public spending was by far the main concern for both panellists and audience. Unfortunately, nobody could see the current government gripping it this side of the 2015 election, and a Miliband government - with or without the Lib Dems - won't even try. 

By the end of the session I was ready to book a one-way ticket to... well, to where exactly? Cyprus would now appear to be out, and Mrs D's arachnophobia rules out the more exotic destinations. Must get back to researching it.

The following is a summary of my own presentation (some bits are updates of recent blog posts, and I'm afraid there are quite a lot of numbers).

As the Chancellor highlighted in his speech, government departments have been significantly underspending against their original budget allocations. The underspend for 2012-13 is now put at £11 billion, an unprecedented shortfall which has narrowly prevented this year's borrowing increasing above last year's (£120.9bn vs £121.0bn). However, of much more significance is the continuing overspend against the government's revenue base, a problem he did not address in the budget.

The Coalition's first budget in June 2010 set out a path for public spending that saw it rise from £669bn in 2009-10 to £757bn in 2015-16, an increase of 13%. Given the urgent need for fiscal consolidation, many commentators - including the TPA - thought that not nearly tough enough. However, it was justified on the basis that economic recovery would boost revenues and close the deficit, just as it had done after the recessions of the early 1980s and 1990s.

Unfortunately, that hasn't happened. Growth has been feeble, and the economy is now (2012-13) 4% smaller than it was forecast to be back in 2010. Worse, according to the OBR's latest forecasts, the shortfall is expected to go on getting bigger, reaching 7% in real terms, and 9% in cash terms, by 2015-16. Over the whole of this Parliament (2010-11 to 2015-16), the OBR now reckons the economy will grow by just 6%, compared to its June 2010 forecast of 14%.

Relative to our economy and its capacity to bear taxation, government overspending is even worse than it appeared in June 2010.

Spending still planned to increase

The following chart shows spending in cash terms (Total Managed Expenditure - TME) since the start of Labour's reckless spending surge. As we know, that surge more than doubled spending in cash terms and even in real terms increased it by one-half. From 2009-10, it compares three plans:

• Labour's final plan
• The Coalition's first plan - June 2010
• The Coalition's latest plan - March 2013 

Key points to note:

• All three plans incorporate a sharp slow-down in growth from the surge years, but there's not a huge difference between them. 
• Spending in 2013-14 is now planned to be £720bn - almost exactly in line with the £722bn "spending envelope" set out in June 2010. Which in the narrow terms of public spending control is pretty precise management, and much better than most previous governments have managed.
• However...

...because economic growth and revenue have both fallen well below what had been expected, as a percentage of GDP spending has turned out higher than planned, and revenue much lower. Spending is now running at 45% of GDP, a mere two percentage points lower than what the Coalition inherited back in 2010. Revenue will once again fall well short of spending, at 38% of GDP, leaving government borrowing an unsustainable 7%.

Spending already far too high

The following chart puts the budget spending and revenue forecasts into context, again showing the entire period from 2000-01 through to 2017-18. The gap between the two lines represents government borrowing.

Key points to note:

• Since the privatisation of Britain's big nationalised industries (which removed a large chunk of trading profits from public sector revenues), no government has managed to raise revenues of more than about 38% of GDP: that seems to be the limit on what is politically acceptable and economically sustainable. 
• The public spending envelope remains substantially oversized relative to sustainable revenue. 
• The projected convergence of spending and revenue over the next five years depends crucially on the OBR's growth forecast being realised. 

The OBR is forecasting average growth over the next five years of 2.1% pa. Given recent growth performance, the continuing problems in Europe, our broken banks, and high energy prices, that may well turn out to be optimistic. If so, the convergence of spending and revenue may not happen at all.

Return to the 70s? 

For example, if instead of 2.1% pa growth, we get a prolonged period of 0.5% pa 1970s style growth, the gap remains stuck at 7% of GDP*. All of which will have to be borrowed.

In its first three years the Coalition has already increased the official government debt (PSND) by well over £400bn. By 2017-18, even on the OBR's forecasts, their increase will be nearly £900bn - more than doubling the debt total they inherited. And the official debt is only one small part of the government's overall liabilities.

Debt piled on debt

According the Office for National Statistics, the government's overall liabilities amount to well over £7 trillion, equivalent to five times GDP. The following chart shows the main components:

Interest on the official national debt is currently running just under £50bn pa. The OBR now forecasts it will increase to over £70bn by 2017-18. 

However, all of the government's liabilities require servicing, and if we add in those public and state pensions payments, along with PFI payments, total debt servicing is already running at £170bn pa, and is set to increase to £220bn by 2017-18. 

That means that by 2017-18, over 30% of government revenues will be earmarked to service past liabilities rather than to pay for current services.

Public spending that doesn't add up

With an increasingly large chunk of public spending earmarked for debt servicing, and NHS, Schools, and Aid spending protected inside their preposterous ring-fence, only around one-third of the spending is available for cuts. Nobody has a clue how that can be done inside George's existing spending envelope, including George himself. 

If we don't get a big shot of growth soon, we are facing a massive spending crunch. Forget public sector pay and benefit freezes: we are talking Irish-style 15% across the board cuts for everything. 

*Note I have calculated the impact of lower growth on the public finances using the OBR's own ready reckoner. It's almost identical to the old Treasury rule of thumb blogged here, and it says that a one percentage point shortfall in GDP raises public sector borrowing by 0.7% of GDP after two years. That comprises 0.5 percentage points on the spending ratio, and 0.2 percentage points off the revenue ratio.

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Consolidating Near High Ground

The market bounced back yesterday but on lighter volume.  Today stocks are lower again, at least in the early part of the trading session.  This is somewhat typical of the action we have seen in recent weeks.

In economic news, the March Philly Fed survey came in above expectations at +2.0, which is a nice turnaround from last month's reading of -12.5.  But it is making this data series a bit lumpy.

Existing home sales for Feb. hit 4.98 million units, which is still higher than the previous month's rate of 4.94 million units.  But homebuilders are pulling back today after hitting new highs yesterday.

In earnings news, Oracle's results fell short of expectations and the stock is trading lower on mixed guidance.  Although all 10 S&P sectors are lower this morning, ORCL's results are weighing on the tech sector which is lagging all others so far.

Overnight, Asian markets were mixed.  Although Japan rallied to hit its best levels in more than 4 years.  China's HSBC manuf. PMI came in above consensus at 51.7.  And New Zealand's GDP rose better than expected 1.5%.

Europe's markets are lower today amid weak economic data.  The manuf. PMI readings for France and Germany were both below expectations and continue to show sub-50 readings (read: contraction).  The overall Eurozone PMI was also below expectations at 46.6 and down from the prior month's level of 47.9.

Also in Europe the Cyprus situation remains unresolved.  Russia is looking like it won't provide any loans and the Cypriot banks remain closed.

The dollar is flattish today and commodities are mixed again.  Ag prices are up a little as are precious metals.  Gold prices are higher to $1613.  Oil prices are down near $92.70.  And copper prices are lower again nearing 7-month lows. 

The decline in copper is not a good sign for those economists who believe copper is a good leading indicator for the economy.  If one is expecting a pickup in global growth, you would want to see copper prices steady or rising. 

The 10-year yield is flattish near 1.93%.  And the volatility index is up 4% to 13.21, still below that 15 level we have been watching.

Trading comment: Since breaking out on March 5th, the S&P 500 has rallied as high as 1560 and pulled back to find support near 1540.  Currently it is hovering right in the middle of that 20-point range at 1550.  Obviously a break in either direction would be telling for the market.  But the longer the market trades in this sideways choppy fashion the more likely it is that we see another breakout to new highs.  That has been the pattern for months now, and until we see a change in character for the market the playbook that has been working is to expect more of the same.

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Market Suffers First 3-day Pullback in 2013

The market closed lower yesterday for a third consecutive day.  That was the first 3-day losing streak for all of 2013, a pretty rare feat.  For those that follow "bullish stampede" rallies, this was one of the longest ones on record but the 3-day losing streak brings it to an end.  Fortunately for the bulls, the history of these long stampedes is that after a rest the market usually continues to do well.

Yesterday the market sold off fairly hard after the bank levy tax was voted down in Cyprus.  This morning there are more headlines out of Europe regarding Cyprus.  Futures got a boost this morning after rumors crossed the wires that Russia was going to offer some aid of its own.  But this report was refuted by Russia.  Germany's Merkel said she expects Cyprus to make a new proposal to the Troika.

Here in the US the Fed completes its 2-day meeting today and will release its statement.  We expect to hear more of the same from the Chairman, and that they want to maintain low interest rates and accomodative monetary policy until there are more concrete signs that the economy is on solid footing and unemployment is going down.

The dollar is weaker today but commodities are mixed.  Oil prices are up to $92.66 but gold prices are lower ($1608) as are silver prices.  Copper prices are higher and ag prices are up a bit.

The 10-year yield is a little higher to 1.93% right about on its 50-day average.  And the VIX is down 11% this morning down to 12.75.  While the low levels in the VIX haven't been pointing to heightened volatility in the market, the VIX index itself has become more volatile lately, with 10% daily swings becoming more frequent.

Trading comment: Dip buyers stepped in yesterday when the market was at its lows such that by the close the markets had recouped about half of their losses.  This morning the markets are nicely higher.  After a 3-day dip a bounce should be expected.  The S&P 500 is only 8 points away from a new high.  If that level is recapture soon, it would be another bullish sign.  But I would not rule out a bit more sideways consolidation first.  We started to put some money to work in equities yesterday and will continue to do so on pullbacks.

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Housing Data Still Improving

The markets were higher in early trading but have since faded back to the flat line on the session.  The worries over the Cyprus bailout are still present, but the selling pressure lessened as yesterday's session wore on.

In US economic data, housing starts rose to 917,000 units in February from 910k the prior month.  Building permits increase to 946,000 in Feb from 904k the prior month.  So housing data continues to improve, and with housing being a big sector that should help support this fledgling economic recovery.  With home prices firm, that also supports the wealth effect which ties into consumer spending.  We are playing the housing trend via the home construction etf (ITB), which broke out to new highs today.

In Europe, the Cypriot parliament was expected to vote today, but it has been pushed back.  The banks remain closed, and trading in their stock market has been suspended for two days.  The country's president said that "parliament is destined to reject the bill."

Europe's markets are mixed today.  Germany's ZEW economic sentiment survey came in slightly ahead of expectations at 48.5, but the Eurozone ZEW survey was well below consensus at just 33.4.  Spain's bad loan ratio ticked up in January to 10.78% from 10.44%.

Asian markets were mixed to higher overnight.  The Reserve Bank of India lowered its key rate 25 basis points to 7.50%.  Australia monetary policy minutes left the door open to further rate cuts.  And the People's Bank of China announced plans to drain 39 billion Yuan through short-term repo agreements (tightening monetary policy).

The dollar is flattish today, and commodities are mixed.  Ag prices are higher, as are precious metals.  Gold is trading up near $1611.  Oil prices are slightly lower so far to $93.46.

The 10-year yield is easing back further, below its 50-day support to 1.91%.

And the VIX is another 2.5% higher to 13.70 after a big spike higher yesterday from its very low levels reached last week.  The spike in the VIX should not be a surprise given how low it had gotten.  All we needed was a small catalyst, and Cyrpus fit that bill.  It will be interesting to see if it gets back around that 15 level that it spent several months at or if it continues to hover in this new lower trading range.

Trading comment: The S&P 500 has not had more than two consecutive down days so far this year.  If it closes lower today that would mark the first such occurrence in 2013.  So today is fairly important in that sense.  It would be healthy for the market to continue to pull back and consolidate its recent gains.  There are still lots of folks who feel they are underweight equities at this juncture and are waiting for such a pullback to get in.  We have said that the market rarely accommodates the consensus wishes, so be alert for some twists in the script. 

KAM Advisors has long positions in ITB

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The Spending Problem

It's almost certain that tomorrow's budget projections will incorporate yet another downgrade to growth expectations. Which means that the current plans for public spending have become even less affordable.

Since George's' first budget in June 2010, the Office for Budget Responsibility (OBR) has downgraded its growth forecasts almost every time it's opened its mouth. For 2015-16 - the last year of the current Parliament - it originally forecast GDP would be £1902bn. By last December, it had cut that to £1763bn, a reduction of over 7%. Some of that is accounted for by lower projected inflation (amazingly), but most reflects a real terms GDP reduction of 6%.

So by 2015-16 our national income will be 6% less than George expected back in June 2010. Yet far from trimming his spending budget, he's still planning to spend almost as much.

Back in June 2010, spending in 2015-16 was projected to be £757bn (Total Managed Expenditure - TME). So if he'd cut his cloth in line with the poorer outlook for national income, he should now be planning of spending closer to £700bn. Instead of which, spending is actually projected at £745bn.

Here's a chart of successive spending projections (TME). The top line is Labour's final effort (projection out to 2014-15), the others are successive coalition plans:

As we can see, the June 2010 budget cut Labour's planned 2014-15 spending by 5% in cash terms. And as we can also see, the latest coalition plans have cut it a little further (by about one percent). That's all to the good, but the problem is that with the outlook for GDP so much worse than George initially thought, it needs to go further.

When the coalition took over, public spending was running at 47% of GDP. That was far higher than government revenues at 37%, and wholly unsustainable: as ministers kept telling us, it meant government was borrowing one pound in every four it spent. The plan was to get public spending down under 40% of GDP by 2015-16, and to increase revenues to 39%. Which they reckoned would leave borrowing at a comfortable level.

Unfortunately, things haven't panned out like that. With weaker growth, revenue is falling short and borrowing is significantly overshooting.

Of course, there are plenty of people who say we could solve the problem without further spending cuts. For example, we could tax the rich: except as we've blogged many times, there aren't enough of them. Moreover,  we should note that no government in at least the last 50 years has ever managed to raise much more than about 38% of GDP in tax revenues - that seems to be the limit of acceptability and/or practicality (see BOM book).

Or maybe we could borrow more. Except with inflation a looming problem, and Sterling subject to attacks of the vapours, those fickle bond and currency investors could well take it the wrong way. Especially when we understand that the only reason the coalition's spending totals have stayed within their initial projection is that debt interest has so far been lower than forecast (saving an expected £9bn next year alone). We really cannot afford to upset the gnomes of Zurich, or anywhere else.

But surely, you say, once the economy recovers back to full strength, revenue will rise and these problems will take care of themselves.

Yes, if only.

The problem is that we can't be at all sure what full strength means any more. Back in 2008 the economy suffered a heart attack, and although the jump leads got it back upright again, it's still hobbling around and avoiding strenuous exercise. It may no longer be capable of scaling the peaks it sprinted up during its Ben Johnson years of unlimited debt steroids.

The OBR tries to work out if and how quickly we can expect a full recovery, by assessing potential output both now and in the future. But it's the first the recognise the problems:

"The amount of spare capacity in the economy (the ‘output gap’) and the growth rate of potential output are key judgements in our forecast. Together, they determine the scope for actual growth as activity returns to a level consistent with maintaining stable inflation in the long term. The size of the output gap also determines how much of the fiscal deficit at any given time is cyclical and how much is structural. In other words, how much will disappear automatically, as the recovery boosts revenues and reduces spending, and how much will be left when economic activity has returned to its full potential. The narrower the output gap, the larger the proportion of the deficit that is structural, and the less margin the Government will have against its fiscal mandate, which is set in structural terms... 

But neither the level of potential, nor the pace of recovery, are possible to estimate with confidence, not least because the former is not a variable that we can observe directly in the economic data."

Here's its summary table on potential output growth:

Many people (probably including the OBR) wonder if they are being too optimistic on these key judgements. For example, it assumes that the potential growth of labour productivity in the future will be 1.9% pa, whereas the average growth over the last 15 years is only 1.4% - and since 2008 it's actually fallen.

The horrible reality is that the economy now looks a lot weaker than when the coalition came to power. And with a weakened poorer economy we cannot afford to maintain their initial spending plans. GDP is going to be much lower than he assumed then, but he hasn't cut his spending plans. George needs to recognise that tomorrow and tell us how he's going to address the problem.

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Monday Morning Musings

The markets have opened on a weak note following selloffs in overseas market due to the unpopular bailout proposal for Cyprus.  Cyprus is a tiny country, but the ramifications of the terms of their bailout have the potential to spook investors across Europe.

The Troika said that for Cyprus to receive Eurozone bailout funds, the country would have to enact a 'stability levy'  on its citizens which would call for a tax on bank deposits of 6.75% - 9.9%.  This provision is not going to go over well, and citizens were lining up at their banks to pull money.  The banks have been unable to open, and may not open until Thursday.

The reason why other markets are watching so closely is that this is a new provision of the bailouts, and if this tax is levied on Cyprus people are left to ask who is next?  Could this happen to citizens in Spain or Italy?  That would lead to huge runs on the banks.  But this is a worst case scenario, and it is more likely that the damage is contained to Cyprus and viewed as a one-off.  That said, it bears monitoring.

In economic news in the U.S., the NAHB Housing Market index came in at 44 vs. 46 in the prior month.

Asian markets were down across the board overnight after news of the Cyprus bailout.  Japan was down -2.7%.  China's house prices rose 2.1% last month.  And Hong Kong's unemployment was in-line at 3.4%.

Europe's markets are also lower today.  A flight to safety can be seen in the German bunds where the 10-year yield traded down 6 basis points to 1.40%.  That's even lower than the U.S. 10-year yield which today is lower by 5 basis points to 1.95% and sitting right at its 50-day support.

The volatility index is spiking today, up 13% so far to a still relatively low level of 12.85.

Trading comment: The Cyprus news could turn out to be much ado about nothing.  But as our markets have been marching relentlessly higher it is certainly seen as enough to take some profit taking.  So far the selloff doesn't appear to have the teeth behind it to really scare investors.  Unless we see a much steeper selloff into the close I would expect dip buyers to show up again in the next day or so.  That would fit into the continuing stair-step market pattern.  We have not done any buying yet, but will likely dip our toe into the water today while still keeping some powder dry to do more buying if we continue to pullback.

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3 Opportunities for Marketing to Impact Sales Productivity

Call me an optimist, but in my opinion there has never been a better time for marketing to directly impact sales productivity.  I'd even go so far as to say that we're experiencing a "perfect storm" for this opportunity - i.e., "an actual phenomenon that happens to occur in such a confluence, resulting in an event of unusual magnitude". Wikipedia  More specifically:

• Over 45% of the buying decision today (i.e., for large purchases) is being made before a buyer even says hello to your rep. [translation:  marketing plays a much greater role today in influencing the buyer's journey, and it is incumbent upon us as marketers to better equip reps for this new buyer 2.0 reality] (click here to learn more about the buyer's journey)
• Sales organizations are struggling to make more informed investment decisions, however, in many cases they lack the data and core competencies needed as part of this process [translation: marketing, your internal "customers" have a clear pain point that can be addressed by the "products" and "solutions" that you've been trying to offer them for years]
• Sales organizations are beginning to put in place Next Generation Sales Operations teams to drive greater improvement in sales productivity, taking a more strategic approach than in past years [translation:  marketing, you now have a "buyer" that is interested in what you have to offer and is willing to collaborate with you at the intersection of marketing and sales - i.e., strategic planning, lead/pipeline management, sales enablement and customer intelligence for sales
• At no time in history have we had so many applications focused on improving the interaction between marketing and sales in a more automated and productive fashion - bringing value to sales reps(and channels) in addition to management.

To avoid making this just another blog post about how sales and marketing need to have a group hug, I'd like to get real specific here and focus on 3 opportunities for you, as marketers,  to bring more value to the table for your sales organization (click here for more details and the 5 min. video of this post):

Opportunity #1:  Sales Resource Planning

• Sales is plagued with a lack of information to help them make more informed resource planning decisions.  (e.g., overall staff investment, local staff allocations based upon market share and growth)  Marketing is in an ideal position to add value here.  For example,
• Reach out to your VPs of sales in each region to determine how the market segmentation data you are already buying from IDC can be leveraged to help identify the number and mix of sales teams at the local level
• Provide your VPs of sales with an opportunity to tap into your marketing analytics team for a territory planning exercise. (start with one region.. .or better yet, one country as a pilot test and a way to demonstrate impact)

Opportunity #2: The Account Planning Process

• The most productive sales organizations have shifted their traditional account planning process into the next generation of account planning. . . . . . one which taps into the intelligence of their entire company and ensures that the account planning process is dynamic and supports more tactical opportunity management activities throughout the year. Be there for your sales organization as they make this transition.  For example:
• Insert your team into sales’ annual planning and regular opportunity management processes, providing in-depth market and customer intelligence that is targeted and relevant to them.
• Provide share of wallet data to help sales identify the greatest potential for up-sell and cross-sell opportunities

Opportunity #3:  And last, but certainly not least, Sales Enablement – getting the right intelligence to the right sales teams and channels in the right time, place and format to help move an opportunity forward.  Bottom line here is to ensure that you treat sales enablement as a strategic initiative and not a tactical maneuver.  Improving sales enablement offers the opportunity to increase revenue by 10%!  CLICK HEREfor a full overview of what it takes to be successful in this area, including 14 attributes for a best-in-class sales enablement strategy.

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Our Scary NHS - 3

Maybe he should have a crack at the NHS

According to government health adviser Professor Sir Brian Jarman, ministers and officials could have saved at least 20,000 lives had they listened to his warnings over dangerous NHS hospitals.

Jarman is the co-founder of the Dr Foster company, which provides comparative information on health and social care services. Among other things it produces statistics on hospital mortality rates (Hospital Standardised Mortality Ratios - HSMR) that flag up hospitals with significantly higher levels of mortality than the average. Jarman says their stats identified the problem at mid-Staffs long before any official action was taken, and similar issues at other hospitals now finally being reviewed by the government. He says:

“Those hospitals which had persistently high death rates over all those years and have now been listed for investigation should have been investigated earlier, because it’s quite possible we would have had fewer deaths in those hospitals... [there] must be at least tens of thousands of avoidable deaths in those hospitals alone, when we should have been going in and we should have been looking at them”.

In just the 14 hospital trusts* now being reviewed by the government, he reckons excess deaths number "a bit over 20,000".

This is bad enough. But even worse is the fact that even when Jarman flagged up his concerns directly to Labour Health Secretary Andy Burnham, nothing was done. In March 2010 he sent Burnham a list of hospitals with significantly high death rates and nothing happened. Nothing.

It's not hard to see why. Because March 2010 was just two months before the last election. No way would Burnham - or any other Health Secretary - have wanted that blowing up during the campaign. With politicians at the controls, patient safety must always come second to political imperatives.

Not that Burnham ignored Jarman outright. According to Burnham's own account, he referred the matter to the Care Quality Commission, who "did not find that there was anything to worry them". Further, Jarman's HSMR data was "new" and "the government could not put it's full weight behind it".

Hmm. Here we have an officer of the state, warned that his state owned industry is going seriously off the rails, and relying on his own state commission and own state statistics to check it out. Does that sound like a recipe for customer safety?

Now, nobody's saying Burnham's a bad man. True, he's a politician, but just like every other Health Secretary in living memory he found it impossible to manage our huge NHS to deliver as he (and his customers) would have wished. He found himself as one against one-and-a-half million staff, staff who know far more about their business than he could ever hope to find out. And if his managers choose to tell him there's nothing to worry about, how can he possibly hope to find out what's actually going on down at ward level? As always, information is power.

Which is why the current Health Secretary, Jeremy Hunt, is now making it a criminal offence to fiddle NHS stats. In future, anyone cooking the figures for hospital mortality, or waiting lists, or anything else in the NHS, will face a jail sentence and their employing trusts will be fined millions. Hunt says:

“This is about a transparent, honest and accountable NHS. Patients and the public should be confident that they can trust information about how hospitals are performing, and a culture of honesty and accuracy will help those organisations drive up standards of care."

A new culture, yes, that's what we need all right. But can criminal sanctions deliver it? Out East, they have plenty of criminal sanctions to support the right culture - and we're talking sanctions that are a tad more bracing than three months in Ford Open Prison. Yet their new management team inherits a state behemoth with all the NHS problems plus a few more besides.

"President Xi Jinping told the nearly 3,000 delegates gathered at Beijing’s hulking Great Hall of the People that his government would “resolutely reject formalism, bureaucratism, hedonism and extravagance, and resolutely fight against corruption and other misconduct in all manifestations.” Shortly afterward, freshly appointed Premier Li Keqiang said the central government would slash its payroll and freeze spending on overseas trips, guest houses, office buildings and new vehicles in response to falling revenues. “The central government will lead by example and all local governments must follow suit.”

Formalism, bureaucratism, hedonism, extravagance, corruption, and other misconduct in all manifestations. Well, maybe the NHS hasn't quite ticked all of those boxes yet, but on my count it's done at least four out of six.

Good luck to the reformers, both out East and here in the NHS. But meaningful reform in big organisations whose customers have no choice is next to impossible.


*Just so you know, here are the 14 hospital trusts now under review for having significantly higher than average death rates:

• Basildon and Thurrock University Hospitals NHS Foundation Trust
• Blackpool Teaching Hospitals NHS Foundation Trust
• Buckinghamshire Healthcare NHS Trust
• Burton Hospitals NHS Foundation Trust
• Colchester Hospital University NHS Foundation Trust
• The Dudley Group NHS Foundation Trust
• East Lancashire Hospitals NHS Trust
• George Eliot Hospital NHS Trust
• Medway NHS Foundation Trust
• North Cumbria University Hospitals NHS Trust
• Northern Lincolnshire and Goole Hospitals NHS Foundation Trust
• Sherwood Forest Hospitals NHS Foundation Trust
• Tameside Hospital NHS Foundation Trust
• United Lincolnshire Hospitals NHS Trust

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How Big's The Deficit?

Rather bigger than we're led to believe

Dave and George have long boasted about cutting the deficit by a quarter. And if you look at the official numbers, they're right: over their first two years (2009-10 to 2011-12), Public Sector Net Borrowing fell from £159bn to £121bn, equals 24%.

But as you may have seen elsewhere, everybody's authoritative fiscal expert - the Institute of Fiscal Studies (IFS) - now reckons there's a greater than 50% chance that borrowing will go back up again this year. So despite the boasts, and despite all that "austerity" the BBC keeps banging on about, borrowing is actually going up.

Well, when we say borrowing's going up, what we mean  is that it's going up if we strip out a couple of fiddles George has inserted to make sure that the headline total goes down.

Fiddle 1: This year's investment spending total has been artificially reduced by netting off £28bn of investment assets transferred in from the Post Office pension fund. That transfer arises from the government's decision to take direct responsibility for paying retired postman their pensions, so it is very far from being free money. It is a one-off receipt against which taxpayers are now on the hook for a liability well in excess of £28bn. Yes, it's another one of those off-balance sheet jobs that G Brown used to do so well.

Fiddle 2: Government income has been artificially increased by taking into the Treasury's coffers the interest receipts earned by the Bank of England from its Quantitative Easing (QE) programme. As you know,  the Bank has bought £375bn of interest earning assets (mainly government gilts), and had been keeping the income in its own accounts. Now George is taking it, which will cut borrowing by an estimated £6.4bn this year. And yes, that's another stroke that reduces borrowing today, but increases it tomorrow - almost certainly by a lot more than today's reduction.

In fact, the QE programme could end up costing taxpayers quite a lot. Because at some stage, the Bank will have to put the programme into reverse, selling all those gilts it has been buying since 2009. If gilt prices have fallen by then, it will make a capital loss. And gilt prices are highly likely to have fallen because there will be a major seller in the market (ie the Bank), which had previously been a major buyer: instead of propping up prices, the Bank will be undermining them. True, the Bank itself currently reckons the price falls will not be sufficient to wipe out the gains previously made. But in reality, by the time of the sales, inflation is likely to be a whole lot higher than now. Which means interest rates will have ramped up, gilt prices will have crashed, and taxpayers will be on the hook for tens of billions of losses.

Stripping out these fiddles, the IFS reckons that government borrowing is set to increase from £121.4 billion in 2011–12 to £125.4 billion in 2012–13 (or from 7.9% to 8.0% of national income).

As for government debt, during those 13 years of Labour profligacy, the official national debt increased by just over £400bn. Under the Coalition, in just 5 years, debt is projected to increase by around £600bn. Absolutely effin' brilliant.

Of course, there are plenty of people who will tell you we needn't worry about high government borrowing or mounting debt. We're in the middle of the biggest recession since the 30s, and government needs to keep up spending to get us through. Government borrowing may be high in the short-term, but once the economy recovers, tax revenues will come pouring in, spending can be throttled back, and the government finances will be back in the black. So stop worrying!

Sounds great, but how can we be sure the economy will recover enough to do that? If the economy doesn't recover, then tax revenues won't come pouring in, and we won't be able to throttle back on spending. We'll just go on building up a bigger and bigger national debt, until something goes bang. And we most assuredly wouldn't enjoy that.

Economists attempt to get a handle on this by distinguishing between the government's actual budget deficit and what's known as its structural deficit. And indeed, George's main fiscal rule is to eliminate the structural deficit on current spending by five years in the future.

The idea is that the year to year deficit is driven in large part by the temporary effects of the economic cycle, and to get a proper fix on its underlying fiscal position we need to strip out those effects, which will correct themselves as the cycle reverses. That is, as we enter the upswing, tax revenues will automatically grow, and social security spending will automatically fall (the famous automatic stabilisers).

Last December the Office for Budget Responsibility (OBR) estimated that public sector borrowing next year (2013-14) will be about £100bn. And of that £100bn, getting on for £40bn will be temporary cyclical borrowing, the stuff we don't need to worry about.

So straight away we can see that £60bn is not temporary. And of that, well over half is current spending (ie it's not investment). Which is spending we need to rein in soonest.

Moreover, although in theory it's easy to distinguish between the structural and the cyclical components of the deficit, in practice, it's very hard. Nobody actually knows how much of our current economic weakness can be put down to temporary factors, and how much represents a permanent state of affairs. Nobody knows how much of the downturn is cyclical and will reverse, and how much is a loss of all that frothy unsustainable business that built up during the Brown bubble.

The cyclical shortfall between the actual level of output in the economy and potential output is known as the output gap. For 2012, the OBR estimated that the gap was about 3%. However, outside analysts reckoned it could be anywhere between 1% and 5%:

Without going into all the arithmetic, that range of opinion on the output gap translates into a range of opinion on next year's structural deficit running from £40bn up to £90bn. At the high end, that implies that nearly all of next year's deficit will be permanent: it will not automatically disappear as the economy recovers back to its full potential output.

So where's borrowing now?

We'll get the latest detail in George's budget next week, but net of fiddles, it looks very much like it's increasing. It's likely to be higher this year than last, and looking forward, those so-called automatic cyclical factors may not bring it down nearly as fast as many hope.

Spending cuts, George. More of them, and soon.

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