Underperformance Pay

More shocking revelations this morning on the pay of top public sector bureaucrats:

"Chief executives of foundation trusts � the top band of NHS trusts � earned �157,500 in the year to March 2009 and had a 7.8 per cent salary rise. The report, from Incomes Data Services (IDS), showed that the average pay rise for chief executives across the health service was 6.9 per cent � the equivalent to an annual salary rise of almost �10,000. It followed a 6.4 per cent rise in 2007-08."

This compared to a 2.75% rise for nurses, and put the top paid managers on well over �200 grand a year.

The editor of the IDS NHS Boardroom Pay Report says: �It seems that the equation has fallen on the side of high salary awards with pay continuing to run ahead of the rest of the workforce.� Yes, it sure does seem that way.

So how can it possibly be justified?

We're back to the peanuts and monkeys argument - if taxpayers aren't prepared to pay up, then the public services will be run very badly.

But paying loads of money to the bosses doesn't necessarily solve the problem. You could simply end up with a bunch of overpaid monkeys - and there are plenty of indications that the NHS has done precisely that.

The more thoughtful public sector managers recognise that their big pay increases have not resulted in much change. The extra money has simply gone to people who would have been doing the job anyway.

There's a very frank and interesting article on this in today's Times by Sir Norman Bettison, the Chief Constable of West Yorkshire. He says he's not worth his �213k pa, and goes on:

"People join, and remain in, the public sector because of a sense of vocation � to make a difference to society or to the quality of people�s lives.

The best leaders are those who can secure long-term public value and a vision for their staff. Not some mercenary performance manager peddling a short-term fix. And, here is the irony: public sector leaders would have continued to provide that leadership for far less pay."

Well done Sir Norman, for sticking your head above the parapet.

And even if all this extra money did somehow manage to attract a whole new cadre of brilliant managers from outside, would they be able to manage?

Suppose all  those successful private sector managers who've spoken up against the NICs increase had spent their careers working in the public sector instead. Would they have been allowed to manage? Would they have had freedom to take the nasty decisions that are so often necessary to shape winning businesses?

Take the BBC. Personally, I've no idea whether boss Mark Thompson is a monkey, but he sure gets a load of peanuts (�800 grand pa). And yet nobody could seriously argue he runs an efficient operation. BBC waste and expense is legendary.

Just today we hear he's caved in to pressure on closing down 6 Music. Here's a pop-pickin' music station that costs taxpayers a packet and could easily be provided by the private sector (if there's actually a demand for it, that is). But a few months campaigning by opponents of closure - and doubtless some backroom pressure from the politicos - has sent Thompson running for the hills. He's folded without a fight.

And that's the public sector for you. There's no upside for managers taking courageous decisions. There's no crucial bottom line like private sector businesses have. No paying customers whose word is law. Just a load of political pressure and fudge.

As we've blogged many times, the only way we can achieve real efficiency in the public sector is to break it up, and put customers in charge. Choice and competition are ultimately what drive efficiency in the private sector - not better managers per se. The better managers are the result of choice and competition, and the horrible realisation that nobody owes you a living.

When it comes to the recruitment and retention of managers, the truth is that most public sector organisations are in competition not with the private sector, but with other public sector employers. The reason that the public sector is unappealing to management talent from the private sector is not a simple question of pay, but the contraints under which public sector managers must operate.

Which leaves us paying increasing amounts of money for underperformance. Underperformance that is hard-wired into the public sector's very structure.

PS Not everyone thinks all those pay increases for public sector bosses have been wasted. The colourful and controversial London Assembly member Brian Coleman was last night given a free hit by BBC News to say that objectors like the TPA "know the price of everything and the value of nothing". The really shocking thing is that Coleman - who incidentally spent nearly �10 grand of our money on taxis in 2007-08 - reckons he's a Tory. He makes Tyler ashamed.

Public Sector Jobs As Welfare

Enough pyramids already

How many of our 6m public sector jobs are just another form of welfare?

The reason I ask is that listening to today's BBC coverage of the continuing debate over National Insurance Contributions (NICs), the question didn't get a mention.

The BBC naturally began the day by giving prominence to Labour claims that the Tory plan will cost jobs because of the associated spending cuts. But as the day progressed , it gradually dawned on them that all parties are planning to cut spending, so all parties will cut jobs. And that's A Very Bad Thing.

And on one level of course, it is a bad thing. Nobody likes to see people losing their jobs.

But the trouble is public sector jobs cost money. And right now, we don't have any money. So unless we cut spending on public sector pay, we'll have to find the money by some other means - like increasing NICs, which will cost up to half a million private sector jobs.

However, even setting aside that point, how many of these jobs are producing valuable output - stuff the rest of us actually want?

Suppose for a moment we weren't under the money cosh. Suppose we had fiscal flexibility to employ all our current public employees and maybe some more on top. Would that make sense?

Consider this famous quote from John Maynard Keynes:

"If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of repercussions, the real income of the community, and its capital wealth, would probably become a good deal greater than it actually is."

Which is more or less the current Labour argument - keep all our public employees in jobs because, although many of them are doing the public sector equivalent of burying bank notes and digging them up again, at least they're in employment, which must be a good thing.

Keynes went on to extol the benefits of ancient Egyptian culture:

"Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York."

What he's saying in essence is that there's a mass of people who for whatever reason cannot produce anything that other people want to buy. So the best thing to do is employ them on public projects. Projects that don't compete with the stuff other people are producing , by reason of the fact that these projects don't produce anything of any actual value to anyone (other than the producers themselves and the high priests/commissars).

This is public employment as welfare. And when we look at the high dependence on public sector jobs in the depressed regions of Britain today, we can see it's more than an empty slogan.

The one slight snagette is that welfare employees still need paying (even the Egyptian slaves still needed feeding). Which means that someone else has to part with the fruits of his own labour in order to provide the wherewithal. And all he'll get in exchange is the sight of another new pyramid, or if he's lucky, a government promise to repay the loan in some distant future, probably in debased coinage.

Getting low skill, low productivity, welfare dependents into work is going to be one of the very toughest challenges facing Cam's government. Given the catastrophic fiscal legacy, leaving them on the public payrolls will not be an option.

PS Interesting article here about the ancient Egyptian economy. It was essentially a command economy, with high levels of taxation and slavery. Life expectancy was 24. Keynes was a towering genius who shed huge light on the way economies work. But he was also a member of the Bloomsbury group of champagne socialists, who had little faith either in the market's ability to invest rationally, or to provide jobs for all. He believed in the existence of noble commissars, such as his good self, who could plan and organise things much more scientifically. Not a lot of people know that. Or at least, they choose not to remember it.

Busted

I dare you to watch (you'll need to keep a sick bag handy)

Do you remember 1997?

Of course you do. Who could forget that brave new world? A new day had dawned, had it not. A new leader, a new beginning, and a new Chancellor. A Chancellor who admonished his debt-addicted predecessor thus:

"The Chancellor is first and foremost the guardian of the people's money."

Yes indeed, ladies and gentlemen - the People's Money. The money that belongs not to the selfish grasping rapscallions who earned it, but to The People.

"During the 1990s the national debt has doubled. This year alone the taxpayer will pay out �25 billion in interest payments on debt, more than we spend on schools. Public finances must be sustainable over the long term. If they are not then it is the poor, the elderly, and those on fixed incomes who depend on public services that will suffer most. So, as with our approach to monetary policy, so in fiscal policy: we will now establish clear rules, a new discipline, openness, and accountability.

My first rule - the golden rule - ensures that over the economic cycle the Government will borrow only to invest and that current spending will be met from taxation.

My second rule is that, as a proportion of national income, public debt will be held at a prudent and stable level over the economic cycle. And to implement these rules, I am announcing today a five year deficit reduction plan.

Together, these rules and this plan will ensure a historic break from the short-termism and expediency that have characterised the recent fiscal policies of our country. As with our monetary policy, our fiscal policy will be all the more credible for being open and accountable."

Yes, that really is what he said.

And here we are 13 years later, with debt that has already doubled again, and which is set to double again by the end of the next parliament. And debt interest payments that within a year or two will again exceed the hugely increased schools budget.

As for ensuring "a historic break from short-termism and expediency", he did that all right. Entirely disregarding short-term considerations such as red signals, and matters of expediency such as staying alive, he cranked the controls to max and slammed us into the buffers at speed. From where recovery will be a very long-term undertaking indeed.

Of course, Brown also made a number of other ludicrous pledges during those first golden months. And one of the central ones was to lift the UK's productivity levels up to those of our more successful competitors. As he put it in his 1998 budget:

"..over the next few years we must seize this opportunity - by challenging ourselves to lift our productivity in each and every industry towards the levels of the world's best...

Breaking free from old ideas of state control and crude laissez-faire, our new ambition for Britain must be... to implement for our country a medium term strategy for growth."

Not the failed Wilson National Plan, you understand, nor the failed Callaghan industrial policy with its National Enterprise Board. No, a medium term strategy for growth - something brand new and whizzo and totally 21st Century. Which is how we got all those incredibly complex and expensive arrangements like R&D tax credits.

So how do you reckon it's worked out? How do you think we've done in the international productivity league tables under Labour?

As it happens, the ONS has recently given us an update. And needless to say, it doesn't look good.

Here's the summary chart, showing UK output per worker relative to G7 average (ex UK). As we can see, despite all the huffing and puffing - and expense - there was virtually no improvement between 1997 and 2008:

Now, you might say thank God. At least Labour didn't make productivity worse.

But you should note that the ONS numbers only go up to 2008, and we know that UK productivity fell during 2009. In fact, according to the ONS itself, output per worker fell by 3.1% in 2009 compared to 2008. So watch this space.

It really is amazing how apparently intelligent people can still recall 1997 with such fond memories (eg Victoria Coren on last night's Question Time). 13 years of Labour deceit and wishful thinking have left Britain crumpled up in a busted heap. Crushed under a pile of debt and economically prostrate.

Public Service Productivity - Still Appalling

Fancy stats, but the picture remains the same

For many years now, the Office for National Statistics has been beavering away trying to develop measures of output and productivity in our public services. It hasn't been at all straightforward, as we can see by glancing at the dense array of statistical formulae they have been forced to deploy.

So why is it important?

Because we've shovelled vast amounts of dosh into these services over the last decade, they now consume well over 20% of our national income, and we need to understand just what we're getting in return. We need to know if we're getting value for money.

And why's that so hard to do?

Because the output of public services is not subject to valuation in the marketplace. We know precisely what cars and window cleaning services are worth, because the marketplace tells us. But with public services provided free at the point of use, we have literally no idea what they're worth.

All we know is that they cost hundreds of billions every year, and since 1997 the bill has more than doubled.

So the ONS has being trying to work out how much of our extra spending has actually fed through into extra output. And this week, they published their latest attempt, which for the first time gave a picture for the whole of our public services (although still excluding welfare payments, and other cash transfers). Here's their widely quoted big picture:

As we can see, they reckon that from 1997 to 2007, the combined output of our public services went up by 33.6%. Unfortunately, the inputs - after stripping out inflation - increased by 38%. So according to the ONS, productivity fell by just over 3%.

Now let's just be quite sure we all understand what that means. It means that compared to 1997, our public services are now delivering worse value for money - we get less for every pound we put in.

Ah well, you say, a fall of 3%... that's not too bad... at least the bulk of the extra money has fed though into more output... at least we are getting 33.6% more healthcare, education, law enforcement etc etc. Could be a lot worse, so quit whining.

Hmm.

Just compare this public service productivity performance with that delivered by the market sector of the economy. According to the ONS, over that same period, 1997-2007, productivity in the market sector increased by 2.2% pa. Which meant that by the end of the period we were getting nearly a quarter more output from the same input.

So why can't our public services manage that? Surely they should be able to achieve at least some productivity gains. Surely they shouldn't be giving us worse value for money as each year passes. How hard can it be?

And in truth, the picture is almost certainly even worse than the ONS figures suggest.

That's because the ONS has incorporated into its output measures a series of highly contentious "quality" adjustments which they claim have the effect of increasing measured output year-on-year.

For example, its measure of education output basically comprises the number of pupils passing through our state schools and colleges. But the ONS now adjusts that straightforward measure for supposed improvements in quality, and they do that by factoring in the year-on-year rise GCSE grades.

What?

GCSE grades as in prizes-for-all-dumbed-down-through-the-floor-abandoned-by-the-leading-private-schools GCSE grades? Why would anyone believe education quality had improved just because our kids have even more of them?

Similarly, the ouput of healthcare services has been adjusted for supposed improved quality using - among other indicators - the reduction in recorded waiting times. Even though we know that waiting times are routinely massaged and gamed by NHS managers (see previous posts).

So the ONS results almost certainly overstate the output growth of our public services and understate the extent to which productivity has fallen.

Indeed, the ONS themselves publish this alternative version of productivity, without the quality adjustment (blue line):

As we can see, on this measure, productivity is down by 9% over the period, a fall of around 1%pa.

Or to put it the other way round, even after allowing for inflation, every pound we put into public services today buys 9% less than it did a decade ago.

Ten years of massive spending has left us with the fiscal headache to end all fiscal headaches. And despite interminable wittering about public service reform, value for money has gone out the window. How long are we supposed to put up with this?

Never mind about "ring-fencing" this or that hot potato public service. Now the money has run out, drastic reform is the only solution:

• choice and competition
• school vouchers
• social health insurance
• elected sheriffs
• localised welfare
• fiscal decentralisation

We all know the score by now.

But sadly, we're still searching for those balls of steel.