Labour’s aim to save £35bn

According to John Redwood, the Labour Government has plans to save £35bn a year. I posted the following comment.

 

 It is good news that the government is allowing for value for money as a consideration. But after twelve years of government, it is a bit late.

 A bit of quick beancounting might put this into perpective. If these are mostly savings they could have made earlier, and assuming they have always been a constant percentage of government spend, then labour’s delay has cost the  taxpayer around £325bn. If it has only built up since the spending hikes in 2001, the figure reduces to £150bn. However, for the government to admit this lower figure would be to admit that a large part of the spending increase was money down the drain.

 Another way of looking at the £35bn is to divide by the number of Labour MPs. It is nearly £100m per MP. As I have blogged before, this level makes the financial amounts of MPs expenses seem trivial.

 But even this annual £35bn only scratches the surface between the best value that can be theoretically achieved and the situation now. There is a lack of dynamism in government in changing service provision to the changing requirements; a lack of expertise in matching real individual (or local) needs to the money available; and a total lack of thought in relating costs to benefits for new initiatives. Add to the mix the strong interest groups in protecting the status quo, and many statutory encumbrances that add little value but a lot of grief, and you have the opportunity to spend a lot less, whilst improving the welfare of society as a whole.

 

To enlarge on why the scope for savings is much larger

 

1)      Much of the government services provided, whether education, health care or welfare payments are based upon a uniform specification. In education, there might be too much spent on some pupils, so that a very small minority will be missed out. The same goes for disability or housing benefit.

2)      Initiatives that flounder. Whether it is the drug addiction schemes that are less than 5% effective or the computer schemes that deliver many times over budget, years late and without the benefits specified.

3)      Lack of marginal analysis. A new initiative will look at the supposed benefits, but not the costs. For instance raising taxes on alcohol, tobacco and fuel may all have the desired results of reducing consumption, but the biggest impact is the reduction in living standards of those whose spend increases on these items. Last year I wrote extensively on the proposed congestion charge in Manchester. My major objection was the same issue. A low charge will be mostly absorbed by the motorists. Only a high charge will cause the majority to switch to public transport.

4)      Ignoring unintended consequences. The smoking ban in public places has triggered a massive decline in the number of pubs. The raiding of pension funds by Gordon Brown has contributed to the decline in final salary schemes. Avoiding recessions after the dot.com bubble burst in 2000 and after 9/11 mean that the boom was prolonged, causing greater grief when the boom finally ended. Doing “whatever it takes” to save the banking system, meant that the exchequer took on hundreds of billions liabilities that may result in massively increasing the National Debt.

5)      Ideological or political appearances. Whether it is “bobbies on the beat” or investing in renewables to meet climate change targets, costs are incurred for public relations, rather than to have any obvious effect. The excessive increases to doctors and nurses in recent years has added billions to the NHS wage bill.

6)      Lack of Expertise in cost negotiation. The government this month signed a £6.5bn PFI deal to widen 38 miles of the M25. In 2004 it was to be £4.6bn for 63 miles.

 

Another attempt at understanding cost control in government was here, where I applied the principals used in my weekly shopping to the issue.

Why have Petrol Prices not fallen in line with the price of Crude?

A colleague asked me why petrol (gasoline) prices in the UK have not fallen in line with the Crude Oil Price.

From the peak price of $145, crude oil is now around $45 per barrel, a fall of nearly 70%.

The prices we pay per litre of petrol has fallen only 25%

 

I did a quick calculation to show him that we have benefitted in full.

Pump Prices for Petrol (Gasoline)
	£ Per Litre (Incl VAT)	£ Per Litre (Excl VAT)
July	1.18	1.00
Dec	0.87	0.76
% Fall	26%	24%
£ change	-0.31	-0.24
Crude Oil Price
	$ per barrel	£ per barrel	£ Per Litre
July	145.00	72.50	0.35
Dec	45.00	30.00	0.14
% Fall	69%	59%	59%
£ change			-0.20

The price at the pumps includes VAT (Value Added Tax). Until 1st December it was 17.5%, then reduced to 15%.

Since July the British pound has fallen from £1=£2 to £1=$1.50, partly offsetting the fall in the crude price.

 

 That the oil companies have had a small reduction in their margins. Extrapolating, if the cude oil price went to zero, the pump price would still be around £0.70p per litre (around $4 per US gallon). Most of this is due to taxation. This has increased by over 50% since the mid-1990s, when pump prices (with 17.5% VAT) fell below £0.50 per litre.

 

The margins of the oil companies may have reduced slightly, but are largely irrelvent to the calculation.