Osborne's Spending Cuts

21 October 2010

Anatole Kaletsky and Martin Wolf, two of the leading names in British Economic Journalism, have both published articles about Osborne's Spending Cuts today. Wolf has focused on the overall fiscal impact of the cuts, and Kaletsky has focused on the detail behind the cuts.

In his article, A spending review for a diminished country, Martin Wolf points out that, given the complexity of the economy and the scale of change, no-one can say with any certainty whether or not the program will work. He says we must remind ourselves that "it is not enough to seek to slash structural deficits. It is also necessary for the economy to grow vigorously." If the scale of the fiscal retrenchment is too great, the cuts become counterproductive and end up increasing not decreasing the deficit. In Wolf's opinion, Osborne has probably cut too much, but only time will tell.

Anatole Kaletsky's article, Gambler George Osborne bets the house, also examines the feasibility of the actual cuts themselves. Whitehall departments are facing dramatic 33% administrative cuts, and about five hundred thousand public sector workers are expected to loose their jobs, hence "public sector managers must achieve breakthroughs in productivity and administrative efficiency of a kind that have always eluded previous governments". Kaletsky continues:

"It is hard to share the Chancellor's confidence that the elimination of 'bureaucracy' will so improve efficiency that services delivered to the public will hardly be affected. While attacks on bureaucracy and centralisation make good rhetoric, efficiency improvements often require more managerial oversight, not less."

"Decentralising decision-making to local authorities, schools and general practitioners may produce better services and more choice for consumers, but it can also result in the sort of big disparities in procurement costs and other measures of efficiency identified a few weeks ago by the Philip Green report [The report described how, for example, a lack of centralised purchasing creates major inefficiencies]."

"To count on huge savings from streamlined purchasing decisions and programmes while simultaneously promising to slash centralised bureaucracy and back-office functions is probably unrealistic." [And Kaletsky predicts the spending cuts will fail].

This brings us to key danger the Conservative led coalition presents to the UK: a teenage obsession with laissez-faire economics, decentralization and direct democracy.

Yet, there are signs of increasing maturity developing, at least as regards to laissez-faire. In June this year the collation axed the regional development agencies, but it looks as if they now realise that move was a mistake. Osborne's earlier emergency budget sought a greater degree of spending cuts in infrastructure, education and science. His latest proposals have sensibly imposed greater cuts in welfare and pensions, and he has flagged this change as an an important tool for growth. In summary, he is no longer as ideologically opposed to government investment, he is beginning to understand that the government has a critical and active role to play in building an advanced and effective economy.

We can only hope that this emerging realization intensifies. If Cameron is to save Britain, he also needs to jettison his ideological obsession with decentralization.

Private sector organizations do not talk about decentralization vs centralization so much as autonomy vs integration. Integration, which exploits economies of scale, is the key to efficient productivity. Although greater autonomy has advantages where rapid response by individual business units in an innovative market is imperative, this is not the challenge primarily faced by UK government. For example, retail banks stress systems integration in order to contain costs, investment banks allow greater autonomy in order to facilitate entrepreneurship. Government departments are more like retail banks than proprietary trading desks.

Competitive autonomy may make sense in education where ingrained practices cripple educational standards, yet there is little consensus about how to respond. In that case, free schools might pioneer innovation and reform. However, in most area of government, the problem is not lack of vision, but rather lack of efficient provision. The NHS provides a spectacular example of this problem, in Singapore a highly integrated centralized rationalized heath service provides a superior standard of care at a fraction of the cost.

One of the things that can damage an organization is vertical power structures. The ideal system delegates responsibility in order to leverage specialist skills, but at the same time it avoids duplicating resources. So micro-management is inefficient, but the delegation process should not create islands, rather interconnected units.

The real problem of UK government is that instead of an integrated system with delegated responsibility, it is the precise opposite. At head of government sit a handful of ministers who frequently involve themselves in minutiae, at the same time the organization is deeply fractious. Senior politicians take excessive responsibility, they need to delegate more responsibility to departmental specialists. Meanwhile departments are run as fiefdoms, whereas they need to be merged into one seamless organization. The existing structure suffers lacks both wisdom and efficiency.

Cameron's Big Society localism politicises strategy, it does not delegate responsibility to those specialists most qualified to make decisions. At the same time his vision of outsourced competing providers destroys economy of scale benefits. Increasing politicisation and decreasing integration results in worse not better policy. This is why the greatest inefficiencies are apparent at local government level, because local government is subjected to greater political forces, and because local government is further from the technical expertise existing within the larger organization.

Of course this argument about politicisation has implications for refrenda, another of Cameron's big ideas - direct democracy. Instead of enlightened delegation, we have a power vertical tyranny of the stupid selfish majority. At the risk of labouring an obvious point, let me quote a few lines from Adam Posen deputy director of the Peterson Institute for International Economics about the failure of democracy and localism:

"The irony for those who have been congenitally suspicious of excessive power being concentrated in Brussels is that the more the central body has had authority over economic policy, the greater the liberalising influence - whether it was the US breaking down barriers to interstate commerce or the Commission implementing the single market. Where and when the member states have retained dominance over regulation and enforcement, as in insurance or property in the US, or in state aid to favoured companies or professional certifications in the EU, the results have been illiberal and economically harmful."

"The alternative to a strong Brussels is not a decentralised free market and minimal government interference. It is greater political capture of economic policymaking and abuse of authority by member states and sub-national governments. Politicisation is more likely and more obstructive to market competition when done by local or member governments than when the federal authority has competence. Subsidiarity is in many cases an invitation to corruption, entrenchment of incumbents and horse-trading of handouts. Too many political veto points equals too many opportunities for extortion."

The essential failure of the British Conservative Party, since Thatcher's demise, is an emphasis on populist conservative liberalism instead of hard headed conservative elitism. Until this ideological obsession is vanquished, it remains a force not of good, but of bad.