Burning Our Money: How Government wastes our cash and what we can do about it

ONE

BURNING OUR MONEY

Dear Chief Secretary, I’m afraid there is no money. Kind regards – and good luck!

– Labour Treasury Chief Secretary Liam Byrne – private letter left for his successor, May 2010

It was a foolish letter to write … I broke the golden rule which is to not write down anything that you are not happy seeing in public and I am sorry that it’s made our job arguing against Tory plans harder.

– Liam Byrne, public apology for his letter, May 2010

A WEEK IN THE LIFE

It’s the second week of July 2012, and we’re in trouble. With the Games of the XXX Olympiad about to start in London, it suddenly emerges we haven’t laid on nearly enough security staff. Despite seven years of preparation and nearly £10 billion of taxpayers’ cash, the entire event is cast into doubt, and what should have been a glorious celebration of national pride threatens to become a national humiliation.

Fortunately we’ve still got the army, and, as so often before in our long island history, they’re summoned to rescue us from disaster. Already overstretched servicemen and women – some still with the dust of Afghanistan on their boots – find leave cancelled and immediate redeployment to crowd control.

The recriminations are storm force, and all eyes turn to G4S, the huge security company originally contracted to provide the staff. It has failed us catastrophically. The company’s share price plummets, and, when its Chief Executive is hauled before MPs for a televised session in the stocks, we all crowd round to hurl stones. But soon the recriminations spread much wider.

For the left, this is a perfect example of how we can never trust the profit-grubbing private sector to deliver public services. Just like all commercial contractors, G4S has obviously put private profit before public duty. In stark contrast, our loyal servicemen have once again put duty first and their own personal interests second. Enough said.

It’s a powerful line, but others point out it’s not quite as simple as that. For one thing, it’s the private sector that’s already supplied virtually everything the Games will depend on: stadia, athletes’ accommodation, ticketing systems, catering, equipment, drug testing, and a host of other essentials have all being supplied by private contractors. Without the private sector, the Games wouldn’t be happening at all.

On top of that, overall responsibility for security rests with the Home Office. Why did it fail to monitor this vital subcontractor? How come it didn’t spot the problem before drama turned to crisis? Were its bumbling officials asleep at the wheel yet again?

Because the Home Office has got form – a lot of form. In fact, it’s presided over so many bungles that a recent Home Secretary publicly condemned it as ‘not fit for purpose’. And right across government, officials routinely mismanage expensive private contractors, with taxpayers suffering the consequences. From defence equipment to IT projects to hospital cleaning, government has a chronic ability to overpay for second-rate delivery.

Neither is it just a problem with managing sub-contractors. This very same week in July 2012 brings a stream of reports showing how poorly the public sector performs when it keeps the work in-house.¹

In education, there’s news that our state schools are trailing way behind their overseas counterparts. Research by education charity the Sutton Trust places us twenty-sixth out of thirty-four leading economies in the proportion of pupils achieving top maths scores. And, despite educating nearly 90 per cent of our children, our state comprehensive schools produce virtually none of our top-scoring pupils. It is failure on an epic scale.

In healthcare, a report from the National Audit Office (NAO) – the official spending watchdog – finds that NHS treatment for stroke victims is fatally sub-standard. A thousand victims a year suffer avoidable death or serious disability because of what’s known as ‘the weekend effect’, which is NHS hospitals failing to provide adequate staff cover at weekends, even though strokes – along with many other emergencies – can strike at any time.

A London coroner lambasts the management and staff of a flagship teaching hospital for wholesale incompetence and lack of leadership. The inquest into the death of a 22-year-old cancer patient has found that he literally died of thirst after hospital staff repeatedly ignored his pleas for a drink. Yet those same incompetent staff and managers remain in post.

And despite an annual NHS budget well in excess of £100 billion, another NAO report concludes that scores of hospital trusts are teetering on the brink of bankruptcy. The system is riddled with financial mismanagement, the cash is running out, and many local hospitals face closure.

Neither is mismanagement confined to the NHS. The latest annual accounts from the Department for Work and Pensions are published, and for the twenty-fourth year in succession the auditors have refused to sign them off. There’s so much fraud and error in the welfare system that the Department is unable to account for all the money, and this year it seems nearly £5 billion has gone walkabout. No private sector business could carry on like this, but in the public sector it’s just one of those things.

Over at the Ministry of Justice, new figures show that violent criminals released early from its jails go on to commit hundreds of further serious offences. In the previous year alone, they included seventy-eight rapes, fifteen manslaughters, and forty-four actual murders.

In the background, routine public sector waste continues unabated. The Department for Transport has wildly overestimated the number of passengers likely to use the Channel Tunnel high-speed rail link, saddling taxpayers with an additional debt of £5 billion. The Home Office reveals that it spent half a million pounds on rubber bullets that can’t be used. And a high-profile programme to save money by pooling back-office services across Whitehall turns out to have actually cost hundreds of millions more than it saved.

All this, and it’s still only Thursday.

A WEEK IN THE LIFE TO COME

It’s now the second week of July 2022, and our defeated World Cup squad skulks back home from Beijing. Playing against the hosts in the cauldron of the Mao Stadium, they were overawed and overwhelmed. Except the sports pages reckon the real culprit is the British government. Following the Qatar debacle, it should have accepted Fifa’s emergency request for us to stage the tournament. Then we’d have been the hosts, and we’d now be in the quarter-finals.

Talk about wishful thinking. Mr Zhou has made it abundantly clear that China’s loans and guarantees to Britain are conditional on robust and visible belt-tightening. The cost of staging the World Cup would have needed specific clearance from the Chinese Directorate of Fiscal Oversight in Whitehall, and they wouldn’t have given it. Our government had no choice but to support China’s own bid.

Anyway, going without a few circuses is nothing compared to everything else we’re now going without. This week the Department of Health admitted there are only twenty-nine NHS GPs left in the whole of London, the rest having gone private or emigrated. The National Audit Office reports that in most areas you can’t now get an NHS hip operation in less than three years, and cancer treatment is virtually unobtainable. New statistics show that one-fifth of our state schools have closed since 2019, with the average class size now exceeding forty-five. And yesterday the Prime Minister confirmed the state pension age will rise to seventy-five next September.

That’s the problem when there’s no money: we have to do what our creditors demand, when they demand it, however painful. Interest on the national debt is now costing more than health and education combined, and, even though we’ve slashed welfare spending, our taxes have gone through the roof. VAT and the basic income tax rate are both at 30 per cent, but that’s just the tip of the iceberg. No wonder the economy has shrunk so much, and people are leaving in droves.

But it’s pointless blaming the Chinese for our troubles: we are paying the price for years of wishful thinking.

We were the ones who chose to believe Gordon Brown’s fantasy island economics, saddling ourselves with huge debts and an unaffordable government.² In 2010, we were the ones who chose to believe a Con–Lib coalition could somehow put things right without causing us distress or inconvenience. Later, when they did try a few distressing things – like reforming the NHS and cutting middle-class welfare – we were the ones who squawked until their nerve failed. Then in 2015, we were the ones who elected a minority Labour government to spend us back to happiness, and reverse the coalition’s very few public sector reforms. Even when the Pound nearly died in 2017, we still failed to understand that government was costing far more than we could afford, and required radical surgery.

Well, it’s out of our hands now. The Chinese are conducting the required surgery with a large axe and no anaesthetic.

Oh, if only. If only we’d started earlier. If only we’d recognised the pressing need to downsize the state and find more efficient ways of delivering public services. If only we’d had the grit and determination to see the reforms through.

STEP ONE

Thankfully, the Chinese Director of Fiscal Oversight has not yet arrived. We do still have some precious time to sort ourselves out. But to get anywhere, we have to take Step One, the step we have avoided for so long. We have to admit we have a serious problem. And it’s not someone else’s problem: it’s our problem.

The problem is that we’ve come to expect far more from government than it’s capable of delivering, and certainly far more than it can deliver at a price we can afford. Because when we entrust things to the government, waste, inefficiency and failure are guaranteed.

Our week of waste from 2012 was chosen solely because it happened to coincide with the writing of this chapter, but a comparable tally of bungling could have been found in pretty well any week from the last half-century. Here are three humdingers from the last few years:

The NHS supercomputer – known officially as the National Programme for IT (NPfIT), it was supposed to deliver a standardised patient record-keeping system at an announced cost of £2.3 billion: it’s now reckoned to have cost five times that, but not delivered the record system.³ In fact, it’s difficult to find any big government IT project that has ever delivered on budget and on time.

The Nimrod MRA4 spy plane – originally planned to enter service in 2003 at a cost of £95 million each, it fell years behind schedule, ended up costing £400 million per plane, and finally had to be scrapped without ever entering service. The cost to taxpayers was £3.4 billion, and the cost to our servicemen even higher: fourteen of them died when their decrepit previous generation Nimrod crashed in 2006, three years beyond its planned scrappage date. And this was just one of many bungled defence procurements: rifles that jam in use, helicopters that can’t fly in rain, aircraft carriers with no aircraft, and all delivered way over budget and way behind schedule.

The Rural Payments Agency – the government quango responsible for dishing out farm subsidies designed such a complex new system that it proved impossible to operate. Payments stopped, we got fined by the EU for late payment, and it cost us over £600 million to put right.⁴ Gordon Brown’s Financial Services Authority was a similar disaster – an overblown quangocracy so intent on the minutiae of its own tick boxes that it entirely overlooked the rampaging elephant smashing up the financial room.

And beyond these News at Ten headline bungles lies a huge morass of day-to-day failure that doesn’t get nearly as much publicity as it deserves.

To start with, government routinely overpays for its supplies. Despite being the biggest customer in the land, it is forever paying more than you or I would pay in the High Street. From office accommodation, to Post-it notes, to drugs, to telecoms, to light bulbs, it wastes money. When one of Britain’s most successful retailers investigated he reckoned he could save an annual £20 billion ‘without even breaking sweat’.⁵

It also overpays for its labour. Public sector employees get paid more than their private sector counterparts, and on top of that they get those famous index-linked pensions. Depending on how you do the sums, the total overpayment is between 10 and 40 per cent, which in money terms is £15 to £60 billion a year.⁶

And on top of the overpayment, there’s also the issue of what our public employees actually do. Politicians like to boast about how many extra doctors, nurses, teachers and police officers they’ve employed, but they never mention the thousands of non-jobs they’ve also created. Such as:⁷

Policy and Research Officer with the Nuclear Free Local Authorities Secretariat at Manchester City Council, on a salary of £38,000.

Walking Coordinator with Islington Council on £32,000.

Climate Change Officer with Braintree Council, which was so concerned about its carbon footprint that it offered a salary of £39,000 for someone to keep tabs on it.

Cheerleading Development Officer with Falkirk Council, salary unknown.

And the over-staffing problem extends much further than non-jobs. Even with its real jobs, the public sector has a chronic tendency to organise itself inefficiently. We’ve all visited NHS hospitals where the nurses seem to spend more time filling in forms than caring for patients. Contact with social services, or the council planning department, or the tax office, often leaves us trapped in a bureaucratic maze, with hordes of different officials getting themselves involved. And it’s no wonder the police are so hard to find when they’ve somehow managed to organise themselves so that only one in eight officers is ‘visible and available’ at any one time.⁸

In the private sector such practices couldn’t be long sustained, because the business would fail. Costs would escalate above revenues and the operation would have to change or die. But there’s no such pressure in the public sector, where organisations can’t go out of business through inefficiency. Change is glacial.

According to the government’s own estimates, public sector productivity growth is virtually non-existent: indeed, on the latest figures, productivity actually fell between 1997 and 2008.⁹ In other words, for every additional pound we put in, we got less and less additional output. During a period when private sector productivity was growing strongly, the public sector became even less efficient than it was before – a truly dire performance.

But worse still is the public sector’s failure to deliver, especially to those who are critically dependent on it. The death of that cancer patient may be an extreme example, but it’s by no means isolated. However much we’d like to believe otherwise, compared to healthcare systems elsewhere the NHS is a killer. Every year, tens of thousands of us die from illnesses that we’d probably have survived if only we’d been treated across the Channel.¹⁰

In education, around one-fifth of our children leave state schools unable to read and write properly, condemning them to a life bumping along the bottom. And further up the ability range, our brightest children are left unfulfilled and falling well short of the attainment levels achieved by their private school counterparts, let alone their counterparts overseas. A school system that has churned out ever higher exam grades has failed both its ablest and least able pupils, seriously undermining our future prosperity.¹¹

As for our welfare system, it now costs an insupportable 15 per cent of our national income, and has consigned millions to dependency. Even at the height of the boom – during which an astonishing 4.7 million additional jobs had been created – we still had over 5 million working-age welfare dependents. Many of them have become, in the words of the legendary William Beveridge, ‘habituated to idleness’, are often seriously depressed, and are quite possibly now unemployable. The welfare system is a personal, social and financial disaster.¹²

Cost overruns, inefficient organisation and failure to deliver add up to a lot of waste. And, while nobody knows quite how much, research published by the European Central Bank suggests it’s well over £100 billion annually.¹³ That’s getting on for £5,000 per household every single year.

WE’RE THE ONES PICKING UP THE TAB

It is the proud boast of our public services that they’re free. Irrespective of our own personal means, they give us free healthcare, free education for our children, free housing and free cash hand-outs.

That’s a very seductive proposition, and if only it was true we wouldn’t need to worry about poor standards and waste. We could just look upon our public services as a disappointing gift – a gigantic version of those knitted socks Aunt Agatha sent for your tenth birthday.

Unfortunately, it isn’t true. The state is not some rich benefactor paying for services out of her own pocket. Everything the state provides has to be paid for by us.

Of course, the bill is not spread evenly, and that allows many of us to believe that someone else is paying – someone else like the idle rich, or perhaps those evil multinational companies we hear so much about.

But that comforting belief is also largely a delusion. Companies may apparently pay nearly 15 per cent of total taxes, but, as lifeless legal constructs, they can’t actually pay those taxes any more than they can drink beer. Their taxes always end up being passed on to us, either through higher prices, or lower wages, or lower dividends on our investments. As we’ll see later, we pay their taxes without even realising it.

And, while the rich certainly pay much more per capita than the rest of us, half of all tax ends up being paid by what’s become known as the squeezed middle – the 40 per cent of households on annual gross incomes between around £25,000 and £60,000. They have to pay because as a group they’re the ones with most of the income. Not that the poor escape scot-free: around one-eighth of all tax is paid by households on incomes below £10,000.¹⁴

The uncomfortable reality is that, in one way or another, we all pay. Indeed, millions of us are in the absurd situation of receiving state benefits with one hand and simultaneously paying tax with the other. In the trade that’s known as fiscal churn, and it means the state is robbing Peter to pay Peter. Worse, Peter doesn’t get back as much as he’s paid in because a chunk is lost paying for the tax collectors and other government officials needed to administer the circularity.

MAKING US ALL POORER

Public sector waste and failure makes us poorer because we have to pay for it through higher taxes – much higher taxes. In fact, if the public sector stopped wasting that £100 billion a year, we could abolish income tax for everyone earning less than £50,000.

But the waste and inefficiency also make us poorer in another way. There is now considerable evidence that beyond a certain point – generally put at about one-third of GDP – increasing government spending as a share of national income undermines long-term economic growth. Productivity growth is much lower in the government sector, and the taxes to pay for public spending act as a drag on the wealth-creating private sector, eroding incentives to enterprise and effort.¹⁵

For example, the European Central Bank analysed the twenty-eight leading industrialised economies over the period 1970 to 2004, a period which saw their average government spending increase from 35 per cent of GDP to 44 per cent. It found that each 1 percentage point increase in that share cut the average annual growth rate of GDP per capita by an estimated 0.12 per cent. Another study, carried out by the OECD, put the effect at 0.15 per cent, and there are a large number of other studies pointing to an effect in the range 0.1 to 0.2 per cent.¹⁶

Over the last few years public spending here has absorbed nearly half of our national income. Back in 1997 it was only about 40 per cent. On the basis of the OECD’s estimate, that increase may have cost us something like 1.5 per cent off our long-term growth rate. Even if we make some adjustments for the current recession, the surge in public spending under the last Labour government is likely to have knocked between 0.5 and 1 per cent off the rate.

Given the current state of the global economy, that kind of handicap is not one we can afford. If we’re serious about growing our way back to prosperity and high employment, we have to cut the burden of public spending substantially.

Of course, that doesn’t mean cutting it all the way back to zero. As we’ll discuss later, there are some things – like defence, law and order, and basic infrastructure – that are essential for long-term prosperity, and only government can provide them. And in a modern economy, one necessary component of basic infrastructure is a population which has mastered the 3Rs, some basic science and a few other things besides. So some level of public spending is necessary, however inefficiently the money is spent. It’s just that the current level is way beyond that minimum.

It’s also way beyond what was envisaged when Beveridge wrote his famous welfare report back in the 1940s. Benefit levels have soared far above any basic safety net, and they’ve become an entitlement rather than something to be earned. State education has expanded hugely beyond the elimination of basic ignorance – although it has shamefully failed to eliminate illiteracy. And the NHS now provides a vast range of costly treatments not even dreamed of when it was founded.

Moreover, there’s no relief in sight. In fact, looking forward, the problem will only intensify. Our population is aging dramatically, driving up spending on pensions, the NHS and care services. Even after the planned increases in pension age, the increasing elderly population is expected to force spending up by a further 4 or 5 per cent of GDP over the next half-century. Which would further increase taxes, and cut our growth rate by perhaps another 0.5 per cent. We are staring at a spiral of decline.

If only we had that rich benefactor, none of this would be a problem. But we don’t, and it is. Our bloated, inefficient public sector is a major drag on future prosperity, and we have to find ways of making it fitter and much leaner. Unless, that is, we fancy a future of economic stagnation, declining living standards and public services run into the ground.

WE CAN’T VOTE FOR LESS WASTE

When G4S bungled its Olympic security contract, the left were delighted. This was the clearest possible demonstration that the private sector cannot be trusted with public service, and if the army hadn’t galloped to the rescue the Games would have descended into chaos.

And it cannot be denied that private sector companies are just as capable of bungling as the public sector: mistakes happen, circumstances change, and even the most successful organisations get complacent. But the vast majority of private sector companies face competitors, and those that make too many mistakes risk going out of business. Customers can simply choose to spend their money elsewhere.

That doesn’t happen in our monopolistic public sector. As customers, we’re forced to pay for the state’s services whether we like them or not. We’re not free to choose whether to pay our taxes, and so unless we’re very rich we’re locked into using public services – however bad they are.

True, when there’s a particularly egregious public sector failure, the organisation concerned will promise to ‘learn lessons’. It may rearrange a few deckchairs, and in extreme cases may even transfer its head elsewhere. But once the dust has settled, experience shows that these organisations carry on pretty much as before. The hospital that killed that 22-year-old remains managed and staffed by the same people. And despite a quarter-century of failure, the DWP won’t be able to account for next year’s spending any better than this year’s.

Now in theory it’s not meant to be like this. In theory, we’re supposed to exercise control via the ballot box: if our public services fail to deliver we can throw out