2014 02 – British Economy

The State of the State we’re in.

Michael Robinson

In an apparently selfless act, Deloitte one of the Big Four Accountancy firms, have taken the trouble to trawl through official government data and reputable statistics, to produce a report titled “The State of the State 2013.   In search of affordable government.”

Before reading the report, I steadied myself with a quote from JK Galbraith, which I recommend to all  – “The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or evade truth, not to reveal it.”

In the preamble to the report we are told –

“Deloitte LLP offers professional services to the UK and European market. With over 14,500 exceptional people in 28 offices in the UK and Switzerland, Deloitte has the broadest and deepest range of skills of any business advisory organisation.  We provide professional services and advice to many leading businesses, government departments and public sector bodies.”

The report is a joint enterprise with Reform, who are described thus-

“Reform is a non-party think tank whose mission is to set out a better way to deliver public services and economic prosperity.  Our aim is to produce research of an outstanding quality on the core issues of the economy, health education and law and order and on the right balance between government and individual. We are determinedly independent and strictly non-party in our approach.”  (my emphasis)

There really is no longer any need to describe yourself as “independent”  and “non-party”, as the prevailing consensus across the Westminster political class is entirely consistent with the analysis of the Big Four, and in too many ways, is directed by them.  We are a world apart from the era in history when in 1971, US President Nixon declared – “we’re all Keynesians now.”

 

Not keeping calm

Deloitte’s report, purports to give “independent and accessible analysis of the UK public sector.”

In its Foreword it states – “Government in the UK has grown significantly over the past 50 years, and demand for public services is set to continue growing in the 50 years to come. With pressure from the global financial crisis, the UK state as we knew it became unaffordable and is now reshaping its limits; the Government – of whatever political mix- cannot simply ‘keep calm and carry on.’

Having introduced panic in the foreword, the “Executive Summary”  explains –

“The UK State is shrinking

In 2008, the global financial crisis hit the UK economy and public finances hard. Our deficit – the annual difference between government spending and government receipts – reached a post war high of £159 billion just ahead of the 2010 election.  Three years later, the underlying figure has reduced to £120 billion and looks set to fall below £96 billion in the next three years.”

There isn’t any analysis of what caused the “global financial crisis”, it is simply treated as though it was some natural phenomenon and no remedial measures are suggested anywhere in the report to make sure banks and financial services are reformed so we don’t have another one.  The report continues –

“Seventy per cent of the Government’s fiscal consolidation measures have been drawn from inflation-adjusted spending cuts rather than tax rises.  As a result, the UK state will shrink by ten per cent in the next five years as public spending as a proportion of our GDP goes down. That is a significant change in the size of our state, though other European countries need to do more; Greece is forecast to reduce by 19 per cent and Ireland by 27 per cent.”

So the state is shrinking, but what’s in this for Deloitte, PWC, Ernst and Young (EY) and KPMG et al?  Here’s their opening –

“However our report argues that while the existing reforms are crucial first steps, more profound change is still required to create the necessary impact on the UK’s balance sheet. No area of state activity can be considered taboo for reform.  That includes public sector productivity, which has become a critical issue for the UK state.” (my emphasis).

 

Enter stage right –  Dr Pangloss

At this point Deloitte hand over the narrative to Dr Pangloss, who gives us the good news, under the heading – “Leaders of our local public services are determined and focused on opportunities”.

It is therefore encouraging that local public sector leaders see opportunities in austerity. “ (sic)

But later Dr Pangloss seems to doubt himself, and states – “However the research also cast light on their fears. Some interviewees suggested that the weakened state of local economies had become a more central concern for their organisation.  A number of those interviewed expressed particular worries about the local impact of the national welfare reforms; they are concerned that lower incomes for vulnerable people will increase demand on local services.”

And so we find there may indeed be something rotten in the state of Denmark, about which more later.

 

Tax income and the widening gap

Following on from their notion of our “unaffordable state”  Deloitte point out –

“Immediately after the 2008 global financial crisis, governments around the world spent £7.1 trillion to support financial institutions. After that, the ensuing economic downturn substantially reduced their tax income, widening the gaps that already existed between government spending and income in many states.”

Now we are on familiar ground, for Deloitte know a lot about tax income.   Not alone do they advise major corporations on tax “efficiency”, losing millions annually to the public realm, they have made such tax efficient arrangements for themselves. As Private Eye has explained, in their case this involves that old favourite – transfer pricing.  The Big Four Partners have established themselves as self employed directors of limited liability partnerships (LLPs).  This company vehicle allows them to separately employ thousands of staff in specially created “service companies”. The Limited Liability Partners then reimburse the costs of the service company and add a “mark-up” that gives a taxable profit. The key thing is that this profit is taxed at a lower rate than the partners would otherwise be liable to. What does this mean?  Quite simply – Ernst and Young LLP “transferred” more than £90m taxable profit to Ernst and Young Services Ltd, saving the partners £18m in tax. PWC LLP transferred more than £80m, netting a saving in tax to its partners of £16m.  KPMG LLP ran the same arrangement saving about £4m, with Deloitte transferring £38m, saving its partners around £7.5m.   Not illegal of course, but see comments on the ethical aspects below.

But Deloitte don’t just employ “exceptional people”, they’re record breaking people too.  The £14 million fine issued by the Financial Reporting Council for their conduct and failure to declare conflicts of interest in the MG Rover Group takeover fiasco, is the highest yet made.

 

ACTION AID Report

Further evidence of concern about Deloitte, is contained in a recent report by Action Aid (www.actionaid.org.uk).  Their report is based on a report by Deloitte titled “Investing in Africa through Mauritius” which indicates how tax can be avoided, citing the example of Mozambique, where “withholding tax liabilities were reduced by 60% and capital gains tax can be reduced from as much as 32% to zero.”

Commenting on the Action Aid report, Kofi Annan declared – “It is unconscionable that some companies …. are using unethical tax avoidance, transfer pricing and anonymous company ownership to maximise their profits while millions of Africans go without adequate nutrition, health and education.”

Unfortunately such concerns aren’t new.  In his Guardian column of 22 January 2012, Simon Jenkins observed –

“Eight years ago, David Craig’s Plundering the Public Sector, calculated that 10 years of New Labour had seen £70bn vanish from taxes into management consultancy, PFI and IT fees, to no noticeable public gain.  Most Whitehall IT projects had been fiascos, and there is a new one each week.  The beneficiaries have been the rich: firms such as KPMG, Deloitte, PwC, Capita, Serco, McKinsey and others.  Today’s public accounts committee may howl about waste, but the stable is bare and the horses are over the horizon, laden with gold.”

 

Leading the way – Norway

There is some good news in the Deloitte report, but it’s not for us.  Their  comparative research shows that –

“Norway is one of the few advanced economies that bucks the global trend, with public spending set to rise by three percentage points. Finland also expects to see a modest increase of half a per cent.  Both of these countries retain the Nordic social democratic model of high taxes and high public spending.

A ‘nordification’ of the UK state – with more taxes to pay for more government – is an unlikely proposition for the future of the UK given the scale of difference between the models of government. By way of contrast, our top rate of income tax is 45 per cent and public spending is 45 per cent of GDP.  Nordic Denmark has a top rate of income tax of 60 per cent and spends 56 per cent of GDP on its public sector.”

This casual dismissal of the Nordic model is all the more galling as we have recently learned that in contrast to Britain, Norway has been investing the proceeds from its North Sea oil and gas into a protected government pension fund, which is used for state infrastructure. The fund now owns over 1% of the world’s stocks, and includes properties in Paris and part of Regent Street in London. Britain, under Thatcher, used oil revenues to cut income taxes, in a huge transfer of wealth to the already wealthy, with the Chancellor Nigel Lawson, slashing the top rate of tax from 60p in the pound, to 40p in the pound by 1988.

In Norway today, the public own almost 70% of the state oil company and its oil fields. In the UK we own the banker’s debts.

 

Wolf of Wall Street

Writing about the film the Wolf of Wall Street, in his Guardian column “Loose Cannon” on 18 January 2014, Giles Fraser stated – “the problem is not a few bad apples. The problem is systemic.  Here is where size matters.  For what was revealed for all to see back in the financial crisis of 2008 was that those banks that are too big to fail were able to get away with pretty much whatever they liked. Moral hazard begins with immunity from growing bust.  The fact that the state bailed out various banks created the absurd reality of socialism for the rich, with profits counting as private gain and losses as a public responsibility.”

From RAG to riches

Reporting against their 10 indicators measuring government success in 2012, Deloitte use the Red, Amber, Green (RAG) traffic light system.  One of their indicators is “Fraud” and it is marked Red.  They cite the National Fraud Authority as assessing that fraud in the year cost the government £20.6 billion.  An overwhelming £14 Billion of this is tax fraud.  Oh the irony.

 

DVA EQIA – PUBLIC CONSULTATION

Following concerted pressure by the (former) DOE Minister Alex Attwood, the Department for Transport Minister with responsibility for Driver and Vehicle Licensing, Stephen Hammond MP, has launched a public consultation exercise on the proposed centralisation of services at the DVLA Swansea. As we have reported previously, the proposals to encourage the public to use on-line services and to re-direct those wanting face to face, same day service, from dedicated Vehicle Licensing offices to the post office network, will lead to a loss of up to 323 jobs in our local economy. NIPSA Challenges the savings claimed.

The consultation documents claim that with an investment of £18m in initial transformation costs, a subsequent annual saving of £12m will be made by these proposals. However, the Department for Transport has an annual budget of around £13 billion and the consequences for the local economy have been described by economists engaged by the Department of the Environment as follows – “It will not only affect the public sector, it could also have an impact on the private sector, given the multiplier effects. This is likely to be severely damaging to businesses in NI, particularly given the current economic landscape. Given how relatively weak the local labour market is, the timing of this proposal could not be worse and will be extremely damaging to the NI economy.”

The same economists calculate that when the “multiplier effect” is applied, a further 1.5 jobs will be lost in the private sector for every public sector job cut. That would bring the total estimated local job losses in Coleraine alone, to around 500. The economists have also established that extrapolating from the respective working populations in NI and GB, a loss of 323 jobs here would equate to a loss of 12,000 jobs in GB, and up to 18,000 jobs when the multiplier effect, which captures the impact on the private sector of public sector job loss, is applied.

The economists have also indicated that economic inactivity and unemployment “is expensive for government, for taxpayers and for society as a whole.” Using “a conservative figure” they estimate that “a reduction in employment of 300 in NI would represent an additional cost to taxpayers of £3m a year.” When this figure is added to the figures for the job losses in GB, the additional costs to the taxpayer will heavily outweigh the savings claimed by the GB Minister.

 

The press release issued in support of the proposals claims motorists will “have access to more vehicle registration and licensing services than ever before at 150 Post Office branches across Northern Ireland.” But it is not at all clear that each post office will be equipped or indeed contracted to offer the same service and we have established that in GB the public can be redirected to different post offices for different licensing services, with only the main post offices offering anything like a comprehensive service.

At present, under the limited relicensing services provided at our post offices, (to those who don’t go to a dedicated licensing office), there is still an error rate in the applications processed. NIPSA has learned that in 2009-10 there were 8,342 errors made, in 2010-11 there were 5,552 errors made and in 2011-12 there were 6,911 errors made. As a consequence of this known error rate, DVA actually employs a number of staff, whose sole function is to correct these errors, many of which can lead to a loss of revenue which has to be recouped directly from the customer or from Post Office HQ. Extrapolating from monthly figures available from last year, the loss in revenue would have amounted to almost £40,000 in a single year.

In contrast, as outlined in the NIPSA Briefing produced in June 2012, for the lobby of Parliament, on an annual basis, DVA registers 117,000 new vehicles, issues 1.4m vehicles licences, 229,000 driver licences, 4,000 taxi licences, 550 road freight operator licences, 6,800 road freight vehicle licences, 2,500 bus licences and 200 bus operator licences. It does this with a customer satisfaction rating currently at 98%. This customer satisfaction rating is certain to be compromised by these proposals.”

Since then, NIPSA has obtained a copy of the report by Customer Focus Post – “Consumer friendly post offices? Access, environment and service quality in Northern Ireland’s post office network”. Consumer Focus Post is part of a non-departmental public body of the Department of Business, Innovation and Skills in GB. Their report published in November 2011, notes – Northern Ireland has only eight Crown Offices, less than 2 per cent of the province’s network and the lowest proportion of any region in the United Kingdom. And further – The Post Office network in Northern Ireland is heavily reliant on the central Government subsidy for survival. However, the Government has indicated that they expect this subsidy to reduce considerably in the future. (“Environment” – page 18).

Later in the report it is noted – “Queuing has been a problem for many years for Post Office customers. As lives are increasingly busy, many are prepared to spend less time in queues, and will seek alternative ways to undertake their transactions. It is therefore an issue Post Office Limited must address urgently before further erosion of customer numbers. (“Queuing” – page 20). At the time of writing, the waiting time target for our vehicle licensing offices is 12 minutes. In 2011-12 the target was 13 minutes, with our staff achieving an average waiting time of only 5.76 minutes. Worryingly, The Customer Focus report in examining “Customer interaction”, noted – Only seven in 10 counter staff were reported as allowing consumers time to make secure, sensitive documents or cash, after their transactions.

These proposals will particularly affect people needing to avail of face to face licensing services, including amongst others, the elderly, the traveller community and people for whom English is not a first language. The EQIA has established already that these groups are the least likely to have internet access and yet the consultation is only available on-line at- http://www.gov.uk/government/consultations/ future-of-vehicle-registration-and-licensing-services-in-northern-ireland We hope that our licensing staff will have your support in this matter and that you will bring these concerns to the attention of your constituents, so that they can have a better informed view of the consultation and the consequences of these proposals.

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