ARmy Rumour SErvice

**Wordsmith** · 16-10-2011, 15:59

Originally Posted by Flight

Currently the national debt is increasing at about £150 billion per year (£163.4 in 2010). Based partly upon growth (which isn't happening) and partly upon reducing the rate that our spending is increasing the aim was to get this down to £125 billion this year and zero by 2015.

Originally Posted by 4(T)

Essentially, to avoid the debt soon climbing to melt-down levels, something the size of the NHS ought to go. I thought Cameron was a complete coward not to "do a Canada" immediately upon entering office - i.e. slash c.10% from each government department's budget just for starters.

Slashing expenditure is a nice thought, but it requires careful planning. Let me give a pertinent example. Suppose that the Queens Own Fast Food Regiment is to be scrapped as part of the defence cutbacks. Obviously, their base closes because it is no longer required, but this has knock on effects. Wall's Newsagents is no longer selling porn and cigarettes to umpteen squaddies, so goes bankrupt. Lo Flung Dung's Chinese takeaway closes for the same reason. The 'Cheap and Nasty' supermarket looses 50% of its turnover, so it gets rid of half of its staff. And so on. So hacking chunks out of the public sector indiscriminately can be counter productive in the short term.

What is needed is very focussed cutting to that the fat goes, but the essential parts are left behind. Eric Pickles seems to me one of the few ministers that gets this - he's going after waste in local government with some enthusiasm. Examples of the savings that could made are:

- Cut a complete tier of management out of most public services. Organisations with 'flat' management tend to be more efficient and responsive to change.

- Reduce what's claimed on expenses. Most people in the public sector don't need first class travel or five star hotels. With improving video call technology, most people in the public sector don't need to travel, period.

- Review the tax system to make it simpler and more efficient. Simple tax systems cost less to administer and are more difficult to evade.

- Avoid large, complex IT systems. The money wasted on these is huge. Use smaller more dedicated systems - transferring data between them at need.

- Etc, etc.

Ministers depend on their officials to implement decisions. And one of the problems the current government has is that many of these officials are Labour appointees who don't agree with cut backs in the public sector. I see from the Telegraph that Michael Gove has just had four such depart.

Four top civil servants quit Michael Gove's department - Telegraph

Four senior civil servants are quitting Michael Gove's Department for Education, amid reports they have been frozen out by the Government. The departures of Sir David Bell, the permanent secretary since 2006, and three others have prompted claims that Mr Gove, the Education Secretary, has engineered a clear out of Labour-appointed officials. Mr Gove now wants outsiders such as senior business executives to apply for Bell's job and to shake up the department. Allies of the education secretary have expressed concern that his proposed reforms are being frustrated by passive resistance from civil servants.

As the saying goes; 10% of a manager's job is issuing the instruction and 90% of it is getting the instruction implemented. I believe the coalition in general (and the Conservatives in particular) are serious about cutting back the state sector to a size the economy can support. But first a minister has to ensure that we cut out unproductive activities and not front line services. And second, he has to ensure those decisions are implemented.

So ministers have to have a clear vision as to what is to be done, they have to ensure that the cuts do the least damage to front line services and they have to be able to overcome bureaucratic inertia. These are rare qualities - which explains why many ministers are 'talking the talk' but not 'walking the walk'.

Wordsmith

**Flight** · 16-10-2011, 17:50

Well yes, if you add in the bank bailouts, pfi deals and pension liabilities then the total does come to around £5 trillion.

PFI deals are pretty much designed to be un-cuttable without breaking contract law. Hence Labour signed on the dotted line promising to pay firms x amount for 30 years if they provided a school building etc.

Adding up the total paid in debt interest, PFI payments and pension payouts would be an interesting exercise. The remainder (from the total tax take) would be what you have left that could be cut back on. I'm not sure what the figures are but I suspect they are grim.

Most of the PFI deals have been signed by local authorities and the like. Hence why your council tax keeps on going through the roof. Say you want a new hospital, or more likely say you think a hospital needs refurbishing. You could either refurbish it out of existing funds or get a private contractor to build you a new one as Coventry did twice. The contractor pays for the cost of building the hospital (when refurbishing the old one would have been less than 10% of the cost) and gets bank loans to pay for it. Once construction is complete the contractor finances the operation through bonds and the taxpayer picks up the total bill, including the interest.

So instead of paying £50 million to refurbish your hospital the local councillors or whatever can now announce that they are investing £500 million in local infrastructure or whatnot. The difference in the figures is the financing costs, typically I believe 95% of the total. Say a PFI deal was announced to the tune of £100 million and sold bonds at 4.8%. After 30 years you would have paid approximately £300 million in interest, plus the £100 million back at the end of the 30 years. This however is just the financing. You would also pay for use of the building / road or widget for those 30 years, effectively putting private sector workers on the public sector payroll.

Hence the contractors are borrowing against the credit rating of the local authority or Quango, which, as it is publicly funded, gets cheap rates.

Estimates seem to vary as PFI is an off-balance sheet mechanism. The public sector doesn't technically owe the money, the contractor does albeit funded by the taxpayer. Most estimates put the total at around £2.5 trillion though.

**jonwilly** · 16-10-2011, 19:36

"Most of the European politicians (and not a few UK politicians) have based their entire political careers on the premise that an enlarged and more powerful EU is good and that the Euro is good for Europe. If you have based your career on that premise, it is difficult (if not impossible) to accept that you have made a major mistake and you will not be treated kindly by history. Because EU politicians want and enlarged EU and the Euro to succeed, they have become like gamblers, doubling up on every throw of the dice. "

Yes, Correct.

john

**Flight** · 16-10-2011, 23:47

To mention pensions again, which account for roughly a trillion of our unfunded commitments (effectively off balance sheet debt)..

Its a while since I looked however iirc the government decided to use 3% annualised growth in order to decide the level at which public sector pensions would be affordable. I don't know of a developed country in the world which has had 3% annualised growth (the US might be close) over a long period of time and certainly none from our starting position.

Corporate pension provision is I believe tied by law to the yield of AA rated corporate bonds. Hence it is illegal to make up your own figures and leave workers with underfunded pensions.

I did see some figures which suggested that a council worker on an above average salary (most of them) and a generous pension ( all of them ) would cost me personally x many thousands of pounds should he live to a ripe old age. Can't remember the exact figure but suffice to say it would have been more than worth my while to put a contract on him at the age of 37 (or whatever age they are allowed to retire at nowadays).

**beagleboy** · 16-10-2011, 23:53

Originally Posted by Wordsmith

Tell you what - I'm a bit short of money now, so can you lend me £1,000 for this month. I realise that'll make you a bit short in November, so I'll lend you £500 back. In December we'll take up your suggestion and write off the debts we owe each other. You can write off the £500 you owe me, and I'll write off the £1,000 I owe you - do we have a deal?

And there's the problem - a global debt write off would benefit those who've borrowed recklessly and pissed the money away and hurt those who have behaved more responsibly.

Write off Greece's debts and Greece will go right on running up debts...

Wordsmith

At last clarity, I understood all of that.

**jonwilly** · 17-10-2011, 01:18

"Write off Greece's debts and Greece will go right on running up debts..."

How true.

john

**Balleh** · 17-10-2011, 10:12

Originally Posted by Flight

Well yes, if you add in the bank bailouts, pfi deals and pension liabilities then the total does come to around £5 trillion.

PFI deals are pretty much designed to be un-cuttable without breaking contract law. Hence Labour signed on the dotted line promising to pay firms x amount for 30 years if they provided a school building etc.

Adding up the total paid in debt interest, PFI payments and pension payouts would be an interesting exercise. The remainder (from the total tax take) would be what you have left that could be cut back on. I'm not sure what the figures are but I suspect they are grim.

Most of the PFI deals have been signed by local authorities and the like. Hence why your council tax keeps on going through the roof. Say you want a new hospital, or more likely say you think a hospital needs refurbishing. You could either refurbish it out of existing funds or get a private contractor to build you a new one as Coventry did twice. The contractor pays for the cost of building the hospital (when refurbishing the old one would have been less than 10% of the cost) and gets bank loans to pay for it. Once construction is complete the contractor finances the operation through bonds and the taxpayer picks up the total bill, including the interest.

So instead of paying £50 million to refurbish your hospital the local councillors or whatever can now announce that they are investing £500 million in local infrastructure or whatnot. The difference in the figures is the financing costs, typically I believe 95% of the total. Say a PFI deal was announced to the tune of £100 million and sold bonds at 4.8%. After 30 years you would have paid approximately £300 million in interest, plus the £100 million back at the end of the 30 years. This however is just the financing. You would also pay for use of the building / road or widget for those 30 years, effectively putting private sector workers on the public sector payroll.

Hence the contractors are borrowing against the credit rating of the local authority or Quango, which, as it is publicly funded, gets cheap rates.

Estimates seem to vary as PFI is an off-balance sheet mechanism. The public sector doesn't technically owe the money, the contractor does albeit funded by the taxpayer. Most estimates put the total at around £2.5 trillion though.

I recall reading in the press about 3 years ago that an E Anglian local authority committed to a 60 year PFI contract !

**stacker1** · 17-10-2011, 10:20

Originally Posted by Balleh

I recall reading in the press about 3 years ago that an E Anglian local authority committed to a 60 year PFI contract !

Time to buy some shares in these PFI firms then
Private Finance Initiative: hospitals will bring taxpayers 60 years of pain - Telegraph

**Wordsmith** · 17-10-2011, 18:54

Reuters has put up something interesting - a calculator showing how much money the banks will require when they are recapitalised (have additional cash pumped in to cover the losses when one or more of the PIIGS default). Just slide the controls to what you think is a sensible set of values. I come up with 200 billion Euros on my settings - with RBS ending up entirely in state ownership.

BV_STRSTST0711_VF.swf

What's now doing on is the squabble about who pays for it all

1) The banks only want to pay out on the 21% haircut on Greek debt already agreed and say the Euro zone governments should come up with the rest.

2) The governments want the banks to take a 50% haircut on Greek debt and maybe a haircut on some of the other sovereign debt.

3) France wants the EFSF (and possibly the IMF) to bale out the banks. If France recapitalises the French banks from its own resources it'll probably lose its AAA credit rating, putting its borrowing costs up.

4) Germany wants national governments to pay for the cost of the recapitalisation.

5) The IMF says the Euro zone governments should foot the bill.

(The UK is fortunately only on the hook for relatively minor amounts of money for the Euro zone recapitalisation - mainly via the IMF. But there will be an eye watering bill for RBS and Barclay's may need some help also).

So after all the "when will things go pear-shaped" questions, the answer is going to be very soon unless the Euro zone countries put real, verifiable money up to bale out the banks. Make yet more promises and watch the banking system start to seize up. Everyone is now waiting for the Euro zone summit on 23rd October top see if the respective governments come up with the required money or just make more promises.

Wordsmith

**Alsacien** · 17-10-2011, 19:17

Originally Posted by Wordsmith

Reuters has put up something interesting - a calculator showing how much money the banks will require when they are recapitalised (have additional cash pumped in to cover the losses when one or more of the PIIGS default). Just slide the controls to what you think is a sensible set of values. I come up with 200 billion Euros on my settings - with RBS ending up entirely in state ownership.

BV_STRSTST0711_VF.swf

What's now doing on is the squabble about who pays for it all

1) The banks only want to pay out on the 21% haircut on Greek debt already agreed and say the Euro zone governments should come up with the rest.

2) The governments want the banks to take a 50% haircut on Greek debt and maybe a haircut on some of the other sovereign debt.

3) France wants the EFSF (and possibly the IMF) to bale out the banks. If France recapitalises the French banks from its own resources it'll probably lose its AAA credit rating, putting its borrowing costs up.

4) Germany wants national governments to pay for the cost of the recapitalisation.

5) The IMF says the Euro zone governments should foot the bill.

(The UK is fortunately only on the hook for relatively minor amounts of money for the Euro zone recapitalisation - mainly via the IMF. But there will be an eye watering bill for RBS and Barclay's may need some help also).

So after all the "when will things go pear-shaped" questions, the answer is going to be very soon unless the Euro zone countries put real, verifiable money up to bale out the banks. Make yet more promises and watch the banking system start to seize up. Everyone is now waiting for the Euro zone summit on 23rd October top see if the respective governments come up with the required money or just make more promises.

Wordsmith

Closer to 300 billion.

The outcome of the summit is already known, as are the markdowns for GR and PT.
Frankly, I am more concerned about the UK data at the moment and am rather busy with it.