All Customers Are Idiots.

All customers are unthinking idiots. Some of the time. I certainly am and you probably are too. That's agreed. Now what?

You could feel superior, treat them like unthinking fools and create awful bland marketing that ultimately doesn't work.

Or you could realise that they have better things to do than consume your marketing. You could do what marketers are meant to do. You could make them think.

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OECD Supports George

Labour left us with hugely over-priced public services

Contrary to what the BBC and Labour would have you believe, the mainstream economic consensus strongly supports George's assault on the fiscal deficit. They support his plans to squeeze public spending and cut welfare benefits, and moreover they urge him to get on with cutting business and income taxes.

The latest OECD commentary is a striking addition to this support. The OECD says:

"The comprehensive budget announced by the government on 22 June was courageous and appropriate. It was an essential starting point... OECD shares the UK government’s position that fiscal consolidation is a policy for growth...

UK productivity is hampered by slow or partially implemented structural reforms to public services and low levels of resource utilisation. Healthcare and education services are relatively inefficient... The cost of producing public services in the UK is well above the OECD average and has risen significantly over the past decade..."

So the OECD agrees that cutting the deficit is the way to boost sustainable growth - not undermine it as the left claim. They also agree that our public services have grown inefficient and costly under Labour, and require serious surgery.

On taxes, they support George's move to cut the Corporation Tax rate, but urge him to go further. In particular, they want him to reverse Labour's crackpot increase in the top rate of income tax to 50% (as we've blogged previously, it will damage incentives and may well end up reducing tax revenue).

The only question now is WTF the OECD - who we pay £15m pa for BTW - didn't say any of this while Labour were still at the controls? It might have saved a lot of grief if they'd told us then, before we'd mortgaged the grandchildren.

It all comes back to that independence thing. The OECD is an excellent organisation in many ways, and employs a lot of very talented people. But unfortunately, any organisation directly funded by politicos is always going to have problems speaking the unvarnished truth unto power - especially in public. And doubtless Labour could argue that very point applies equally well to this latest report.

Which brings us back to the unfortunate events surrounding Alan Budd and the Office for Budget Responsibility. Here was a genuine attempt to establish some independence from government, headed by a man of apparently unimpeachable integrity with absolutely no ambition to do the job long-term. But it's still come horribly unstuck. Yes, it's cock-up rather than conspiracy, but the damage has been done.

As we've always said, the OBR must be put on the same footing as the National Audit Office. It must be accountable to Parliament and funded by Parliament, not the Treasury. Of course, there could be problems with Budget secrecy, but the NAO (whose staff sign the Official Secrets Act*) has managed to be a fairly leak-free zone, and there's no reason to think the OBR couldn't be the same.

Somebody needs to be to cracking on with this right now. So let's just hope they are.

*Footnote - Just for interest, here's Alan Budd's appointment letter, setting out the various secrecy conditions applying to the role. Along with his pay of £2885 per week.

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ONS Gets Serious On Public Debt

It used to be so much easier to keep track

Yesterday the Office for National Statistics published a very interesting paper on public debt. For the first time in an official publication, it brings together estimates of all those off-balance sheet Enron items we've blogged so often - public sector pensions, PFI, state pensions, bank bail-outs, nuclear decommissioning - the lot.

And it gives a pretty evenly balanced commentary on the kind of liabilities involved, and some of the estimating problems. Yes, much of this material has been published in dense technical form before, but this paper is much more accessible and mercifully much shorter (a mere 26 pages).

The paper opens with a statement it's worth quoting in full because we might almost have written ourselves:

"Just as for companies and households, the public sector’s balance sheet is central to assessing its financial health. Such a balance sheet would set out the public sector’s assets – what it owns or is owed – and its liabilities to others. A limitation of traditional balance sheets is that the liabilities they include are defined quite narrowly and so exclude a range of potential obligations to others. To ensure that fiscal policy setting expenditure, taxes and government borrowing – is as well based as possible, and in the interests of transparency, the publicly available information on the range of public sector assets and liabilities needs to be as complete as possible."

To which we can only say, hear, hear.

The bottom line is that the ONS is now actively considering whether to include a whole raft of those Enron items in the official measure of public debt. And here's their summary of how that might look (you'll have to click on image to read):

So what does that lot add up to? The Mail's Steve Doughty has done the sums and makes it around £4 trillion - that is, well over four times the current official £0.9 trillion National Debt (Public Sector Net Debt - PSND).

The largest additional items - all of which we've blogged many times - are:

• Debt of nationalised banks - ONS reckons RBS and Lloyd's debt will add £1-1.5 trillion; they're still working on the exact number but will definitely be including it within the next few months
• Unfunded public sector pensions - ONS says the liability is up to £1.2 trillion (interestingly, that's an external estimate from actuaries Towers Watson, rather than the lower - and now discredited - official figure)
• Unfunded state pensions - ONS quotes official estimates of £1.2-1.4 trillion
• PFI - ONS quotes a figure of £200bn (undiscounted)
• Nuclear decommissioning - £45bn

Now, the ONS has not committeed itself to adding all of these to the monthly figures for Public Sector Net Debt, but it does sound as if it intends to publish regular updates of wider public sector liabilities. Which we wholeheartedly support.

Of course, in estimating these wider liabilities, we will expect the ONS to maintain its own high standards of integrity and impartiality.

For example, the official figures it quotes for unfunded state pension liabilities are almost certainly a serious under-estimate. Whereas they quote £1.2-1.4 trillion, external analysts calculate a figure at least twice that (eg see this excellent IEA paper by Nick Silver, which conservatively puts it at £2.75 trillion, and as we blogged yesterday, in terms of the ongoing liability, it isn't difficult to come up with numbers that are a multiple of even that).

Also we're not convinced by the ONS practice of netting off liquid assets from its calculation of public debt. What taxpayers need to know is the size of our gross liabilities. Sure, there may be some assets to set against those liabilities, but those assets can never be entirely secure even if they are supposedly liquid. For example, the deposits our local authorities placed with the Icelandic banks were netted off as liquid assets, but as we later found out, they were most assuredly not secure. And the same goes for the liquid assets of RBS and Lloyds, which ONS are proposing to net off against their liabilities. Doing so will reduce the net debt figure by about £1 trillion, even though taxpayers are actually on the hook for the entire gross debt.

Still, overall, this is another step in the right direction. It is crackers for the nation to depend on external analysts and Tyler's fag packet to calculate the real National Debt, when we employ an army of statisticians who could do the work so much more thoroughly.

The ONS must get cracking and publish the results openly and fearlessly. It's time for us to know the complete and unexpurgated truth about our finances.

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The Biggest Debt Of All

We were all the future once

This afternoon Tyler got a bit of a shock in the Wandsworth one-way system. There right in front of the motor, large as life, was none other than the legendary Ronnie Wood. Yes, crossing the road at the lights - dark glasses, fag in mouth, young lady on his arm, slightly weaving about, the works.

Which got Tyler thinking. Old Ronnie is getting on a bit these days. In fact he's just turned 63, and he'll soon be drawing his state pension*. He's become part of the problem.

Problem? Yes, the horrible fact that we've got far far too many people about to draw their state pensions. Here's the latest official forecast of the burden they will be placing on the national finances:

As we can see, on current policies, the burden increases from around 5.5% of GDP up to around 7% - and many experts think even that estimate is too low.

Now, we've blogged this many times, but since Tyler is currently working on some updated calculations of the real national debt, he thought it would be fun to work out what this burden comes to in terms of debt today.

To make the calculation easy we'll average the Treasury's forecast at 6% of GDP. So instead of having the burden grow as it does on the Treasury forecast, we'll assume it stays at 6% for ever - ie we'll deliberately err on the side of underestimating the debt.

Now, to translate all those annual figures into a single debt figure we have to convert each one into a present value, discounting by an appropriate interest rate. Since these pensions are a government liability, the appropriate interest rate is that on government debt. And since the liabilities are index-linked, it has to be an index-linked gilt yield (the government has now relinked them to earnings rather than the RPI, so perhaps we ought to use an earnings linked gilt, but since there isn't one, ordinary ILG will have to do).

As of now, long-term ILG yields are under 1%, but to keep it simple we'll assume 1% (again erring on the side of underestimating the debt).

What we have here is known as a perpetual annuity (or perp for short). And its present value can be easily calculated with this handy formula:

In our case, A = 6 (% of GDP), and r = 0.01 (which is simply our 1% discount rate expressed as a decimal, ie 1/100). Which comes to 600.

So, what we're saying is that the present value of our future state pension burden, measure as a percentage of GDP, is a cool 600%.

Which, given that GDP this year is estimated by the OBR at £1474bn, is equivalent to a debt in money terms of... gulp... can this be right... £8.8 trillion.

And that gives us a frightening perspective on HMG's contention that our National Debt is "only" £0.8 trillion - less than one tenth of our state pension debt.

Maybe as a public duty Tyler should have jumped the Wandsworth lights and at least made a start on the problem.

*Footnote Some unkind people reckon Ronnie must be far older than 63. They reckon he must be about 250. But what they forget is that Ronnie is a close associate of Keef, who is well known to be immortal. They may both look 250, but that's only because of all those life-extending substances they've ingested over the years. Celery and stuff.

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Make Marketing Timely.

So the World Cup is over. It was interesting last week. This week not so much. So why do I get an email today hawking some social media monitoring analysis of international interest in the event?

Because, in an age of real-time data capture, they presumably did what they always used to do. They waited to the end of their survey to finalise their findings rather than compile it on the fly and produce an interim report that might have sufficiently piqued my interest so that I would be hungry for the final results.

The time when people would be most engaged in that data would be during the tournament or, perhaps, in the run-up to the next major one. Now we're in the land of post-mortems and looking to the next event. Interest has moved on.

Targetting's not just about who and where. When is also key. The customers' schedule trumps your production schedule. Fish when the fish are hungry.

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NHS Reform - How Will The Money Work?

Keep your eye fixed firmly on the money

Tyler has now read Lansley's white paper, Equity and excellence: Liberating the NHS. An ambitious title, but then again, Health Secretaries have never been lacking in the ambitious titles department.

To start with the positive, there's lots of good stuff about putting patients first, more choice, better information, clinicians in charge, and an end to politically driven micromanagement. All problems we have blogged to death, and all problems we are glad to see Lansley promising to tackle.

In fact, we'll go further. Lansley has surprised us by just how radical he is apparently prepared to be. Abolishing the wasteful bureaucratic PCTs and focusing authority in the hands of practising clinicians is a big step, beyond anything we'd expected. He's also going to encourage more private providers into what is clearly the basis of a real market system - all good. Even more encouraging, judging by his punchy appearance on yesterday's Newsnight, Lansley suddenly looks like a man reborn and spoiling for the fight.

But as always, the key question for BOM is how will the money work? And there, the white paper is worryingly vague.

Let's start by reminding ourselves how the money works in the grocery market.

You the punter have the money, and you choose whether to go to Tesco, Sainsburys, Asda, or whoever. You are very keen on getting good products at good prices, because, hell, it's your hard-earned money. Which doesn't mean you cross-check products and prices every week - life's too short. But all the supermarkets know that if they start taking the piss, sooner or later you'll rumble them and you'll start shopping somewhere else.

Now, the supermarket doesn't produce the goods itself. It commissions suppliers to produce all its msg potato wedges and trans-fat pizzas, and it screws those suppliers hard on price and quality. Both are determined by head-to-head negotiation. You the customer don't get involved in any of that, both because you haven't got time, and also because you know absolutely naff all about producing pizzas let alone pricing them. You trust Sir Terry Tesco to make those calls for you. And Sir Terry only survives if he gets those calls right enough for you to go on giving him your custom.

So how does the Lansley NHS model compare?

To start with, you won't have the money. The money will still come from the big black pot up in Whitehall (see Lansley's wiring diagram above). Which straightaway weakens your role in the entire process.

Yes, Lansley does talk about giving we punters "personal healthcare budgets", but in truth, that's never going to work universally and he admits it (no, you can't have that critical second operation because you've already used up your personal budget).

Instead, the "money will follow the patient". How? Lansley is not yet sure:

"... the Department will start designing and implementing a more comprehensive, transparent and sustainable structure of payment for performance so that money follows the patient and reflects quality. Payments and the ‘currencies’ they are based on will be structured in the way that is most relevant to the service being provided, and will be conditional on achieving quality goals."

Hmm. Talk of "currencies" rings a rather loud alarm bell. We already have a perfectly good currency, and it's called the pound sterling. It's simple, clear, and relates directly to the real world outside the NHS. You can bet Sir Terry insists on the real thing, and so should Lansley. The last thing the NHS needs is an outbreak of Funny Money.

And also, how much money will follow the patient? Apparently it won't be the same for all patients:

"Our principle is that funding should follow the registered patient, on a weighted capitation model, adjusted for quality. We will incentivise ways of improving access to primary care in disadvantaged areas."

"A weighted capitation model, adjusted for quality". Riiiight. WTF does that actually mean for the average punter? And who decides what the relative weights are for different types of punter? Will someone with Tyler's chronic conditions get more capitation than an A1 specimen? And if not, what's to stop a profit maximising GP refusing to take Tyler, should he move to Eastbourne? There are an awful lot of dots still to join up.

Then there's the issue of pricing. Whereas Sir Tel sorts out prices mano a mano with his suppliers, in Lansley's reformed NHS, prices for specialist treatments will still be mandated by the same old Commissars in Whitehall. The only difference is that prices will now be set on the basis of "excellent care", rather than bog-standard care:

"We will rapidly accelerate the development of best-practice tariffs, introducing an increasing number each year, so that providers are paid according to the costs of excellent care, rather than average price."

In Tescos, their excellent care range is called "Extra Special" and it's more expensive than the standard range. So does excellence mean the NHS tariffs will be increasing? Or does the word "excellent" actually mean excellently cheap? Again, there are an awful lot of dots still to join up.

But look, let's not carp. Lansley has made a reasonable start, and he is sounding a lot more radical than we'd ever expected. He seems intent on creating a market-based system, intent on broadening the range of providers - including private for-profit providers - and intent on getting those in the NHS to learn the new skills and responsibilities they will need outside the Stalinist world of state monopoly healthcare.

Let's give the man a chance.

Oh, and let's hope Cam gives him the time he needs to implement his plan. The NHS has had more than enough revolving door political masters.

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Dr Croesus I Presume

Andrew Lansley might be about to make our family doctors rich. Very rich indeed.

Because according to this morning's reports he's going to hand over control of £70-80bn pa of NHS cash to them. He's going to abolish the Primary Care Trusts and give their responsibilities for commissioning hospital treatment to our GPs.

What massive spending power they'll have. What huge potential for boosting their own modest stipends. Even the riches they got from Labour's bonkers new GPs' contract (up the £380 grand pa - see here) will seem like small potatoes in comparison. Out-of-work investment bankers (and we know a few) will be queuing outside Guys to retrain as GPs.

To be clear, we agree with Lansley that the NHS is in urgent need of reform. Bloated quangos like the primary care trusts (PCTs) certainly need to go. And the NHS certainly needs to become far more efficient.

For example, according to recent research at the OECD, despite Labour's spending splurge, Britain still has the 8th worst record for preventable deaths among all its members - right down there with Mexico, Poland, and the Czech Republic. And we have the 7th highest potential for efficiency gains in our healthcare system - ie the potential for improving health outcomes without spending any more money. Here's their key chart (the higher the bar, the greater the scope for increasing life expectancy from improving system efficiency):

So yes, the scope for big efficiency gains is definitely there. The burning question is how do you achieve them?

As regular readers will know, we have long favoured putting the customer in charge - just like he/she is when it comes to buying car insurance. Choice and competition to drive efficiency just like it does in other areas.

True, we don't want the US private insurance system, where many have no insurance, and costs are very high (largely driven by so-called information asymmetries and moral hazard - standard problems in private insurance markets everywhere). Which is why we favour a system of compulsory social insurance of the kind they have in most European countries. Everyone has to have cover for a mandated minimum bundle of risks and treatments (premia for the poor being subsidised by the state), and the competing licensed providers cannot refuse to accept customers on the basis of medical screening. The new Dutch system looks like an admirable model (see this TPA blog).

Unfortunately Lansley's reforms do not achieve this. Although he talks about greater patient freedom to choose consultants, in reality few of us are equipped to do that. We will rely on, yes, our family doctor to guide us. The same family doctor who may well in future have a direct financial interest in steering us one way or another.

Fine, OK, you could always switch your family doctor. But have you ever tried it? Not that easy. And what's to stop rascally GPs selecting patients on the basis of medical history/lifestyle/address?

Bottom line?

In breaking up Labour's centralised command and control system, Lansley is definitely moving in the right direction. But putting this vast amount of commissioning authority with GPs will bring problems of its own. And we very much doubt that the customers will get much of a look-in.

PS Cards on the table, Tyler has private health insurance. Why? Because he suffers from not one but two potentially serious conditions that require regular hospital monitoring (no flowers please), and frankly he doesn't trust the NHS to provide either the monitoring or the immediate knife action if required (yes, he's very lucky he can afford it - fair comment). Anyway, just recently there has been a somewhat unwelcome development. The local anesthetists have got together and refused to do the biz for the price laid down by the health insurer. Which means Tyler now has to pay an excess direct to the anesthetist - either that, or opt to undergo the procedure biting on a stick. So what to do? One option might be to switch insurer. Bad idea. With Tyler's pre-existing conditions no other private insurer would touch him (or they'd quote a preposterous premium). Another option would be to can the private insurance altogether and self-insure (ie pay the fees out of his own pocket directly). But although right now, in terms of annual costs, Tyler would roughly break even, who knows what might be required in the future. So that's not appealing either. Of course, if we had a system of social insurance, both of those problems would be resolved. Tyler could shop around for another insurer who had managed to agree rates with the local anesthetists, and who would have to take his biz. And he simply wouldn't have the option of self-insuring - ie if he was lucky enough to have A1 health, he could not self-select himself out of the system. He'd be an active participant in the health insurance market, switching his biz around and driving efficiency.

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