New Year New Thinking January 2014.

Civil Service not Fit for Purpose. Reform or Discontinue..

THE PROBLEM

Things are not getting better

Government borrowing and the National Debt remain too high. The myth that things have and are getting better is wrong and misleading. 

We are nowhere near the pre 2008 levels of GDP or productivity and I can see government borrowing continuing to grow and make the bankers rich way beyond 2017. 

Furthermore, some of this future borrowing will be at even higher interest rates making it even more difficult to run a balanced budget. 

There has been no sustained increase in either the value or the volume of manufacturing output or exports. Given the level of imports necessary to produce increased physical export of products, the fall in exchange rates which on the one hand make us more competitive in international export markets, while on the other adds costs and increases prices of goods sold in the UK. 

Financial sector lead growth and increased house prices are, in the medium and long term a bad thing not a good thing unless we sell all the houses to foreigners and live in tents!

 London too big

The apparent, yet false growth created by London simply increases the cost of living for those of us who live in the capital and a rise in anger and frustration from an increasingly congested city with inadequate infrastructure. 

THE SOLUTION

Less Public Sector Spending 

Further cuts are needed. Both Central and Local Government need to do less at all levels and stop duplication.

We must halt the massive waste and inefficiency associated with public sector and quasi public sector (like the BBC’s £100m right off for failed digital projects) and delivery of services. 

Public sector wages, pensions and number of employees needs to be cut further.

We must reduce the volume of activity carried out by and paid for by Government. A public sector of almost 50% of GDP is a continuing economic and social disaster leading to further national decline. 

We must reduce Government activity to less than 37% of GDP over the next 5 years and keep it going down to create a better and more prosperous Britain.

Where and what to cut is obvious to me, if not to others. It can be done. We just need the will to do it.

  Geographic Rebalance

There also needs to be a move away from Government activity on national matters being performed in London and moved to other parts of the UK (where costs of land and labour are far less) alongside further devolution to regional and local government of decision making and delivery.

 However, in this transfer of power and delivery to local level, costs must go down not up. 

Closer scrutiny is required on ensuring continuing cost reduction during function transfer of decision making and delivery so costs remain on a downward trend. 

Assistant World Policeman

The UK will continue to decline as a Nation of International Importance unless we decide to radically redefine how we see ourselves and how we want to be seen by others. 

Out must go the role of assistant world policeman to the USA, misguided ambitions to be a major, global financial centre and consumerist aspirations for an ever increasing GDP.  

We can no longer afford the current defence and Foreign Policy expenditure budget and need to stop seeing ourselves as one of the 5 leading nations of the world with a major International role and we must give way to stronger, emerging nations and live within our means.

Sector Rebalance

 The UK reliance on income from providing financial services to the world must also be scaled back. The sector is both unsustainable and corrupt and has distorted our economic activity. We should not be seen as the leader in the creation of dubious financial products and the experts in international tax avoidance that helped create the financial crisis of 2007 + nor allow a return to those practices and bank generated over lending for short term bank gain that disadvantages the majority of people in Britain.

New Economic Measurement

 We should reject any national policies to increase GDP based on the current definition that leads to insane consumerism, pollution and rising debt.

 Instead we must consider adopting the role of the world’s most well adjusted nation, embracing new ways of living in peace and harmony, valuing justice, well being and greater economic equality over greed, envy and materialism.

 Our ambition should adapt to being the leading nation in the world in terms of Citizen Contentment, multicultural harmony based on a genuine acceptance of sensible diversity and a desire for Quality of Life rather than Quantity of Life.

This would include a new focus on education and personal development that values our individuality and promotes the idea of us each becoming the best we can be based on our natural talents and choice balanced against the needs of a well functioning society.

This society would exhibit a new understanding of the purpose of life and the acceptance of death and a new relationship between man and the natural environment, a new approach to balancing the enjoyment and consumption of the current generation with that of the generations that will follow, accepting a goal of making the future a better place to be than the past or the present.

It is likely to want to see a fairer distribution of wealth and a closing of the gap between the excessively rich and excessively poor.

Change

The transition to a society less focussed on possessing and consuming things to one more focussed on enjoying the environment and the company of others will not come without change .

Change not only in what we seek to be and have but also in how we get this and sustain it.

I would hope that 2014 will see the start of this process at both a national and personal level.

Myths About Micros………….Why we need a Minister for Micro Businesses

There may be around 5 million SMEs in the UK, however, the idea that if each one was to provide one job by taking on an Apprentice unemployment would disappear is laughable when you dig into the figures.

FACTS relating to private sector businesses

1 Over 3.5 million of the estimated 5 million are one man bands, operating as sole traders or limited companies, plus a few 2 people partnerships that employ no one but the business owners.

For a one person business, taking on one employee, doubles the workforce.

Fewer than 7% of these 3.5 million are ever going to take anyone on part time, let alone full time.

What business, overnight, can afford to double their workforce? How are they going to double sales / profits overnight to pay for the new worker / apprentice?

2 Although around 500,000 new businesses start every year, around 470,000 fail.

Many start and fail in the same year. Over 80% fail within 3 years.

The law says an Apprenticeship must be for over 30 hours a week and last for a minimum of 12 months – this is going to exclude at least 300,000 businesses that start and fail in the same year

3 Over 1.5 million businesses are run from home, many may be breaking their lease or operating in a grey area legally.

With compulsory work place visits from training providers to see apprentices are safe on site and doing the work expected, few employers will want to fail the accompanying Health and Safety expectations and so won’t bother to start the process.

4 Only 1.5 million businesses employ 1 or more employees, fewer than 7,000 employ over 250.

Over 95% of employers have fewer than 50 employees with around 90% fewer than 10.

The idea of taking on the maximum per employer of 10 new apprentices at once is laughable. Almost no business will increase its workforce by 90 or 50 or even 30% in ONE STEP.

5 Wage rates

While the minimum apprentice wage in October 2013 will be £2.68 an hour, my experience, after over 20 years in the micro and start up business sector, is that only those who contribute next to nothing might offer themselves at this wage.

To get someone suitable for a micro business with fewer than 5 employees in London today who will add value to the business (and then only after 3 to 6 months) the necessary wage is at least £4 an hour, around £120 a week.

6 National insurance

Pay over £148 a week and you are into the onerous world of deducting / paying employee and employer national insurance – a major time stealer for micro business owners who generally loathe administration. The requirement of having to deduct tax under PAYE on incomes over £182 a week is a further nightmare.

7 VAT

Millions of micro businesses see having to struggle with Vat regulations even more scary than NI or PAYE and so avoid increasing sales above the Vat threshold of £79,000 a year, £1,500 a week.

The profit made from such businesses is often insufficient for the business owner with dependents to live on, let alone think of taking on an apprentice.

Even those with good margins who may be able to draw £50,000 a year for themselves from the business, would rather stay under the £79k level than face having to charge VAT and handle VAT paperwork and returns.

8 Apprentice Training Agencies (ATAs)

Many positive aspects but 2 killer implications.

First, a 20% fee, based on the apprentice wage to cover the ATA’s fees.

Second, Vat at 20% on the bill – but as stated above, many businesses are not registered for Vat and will be unable to claim it back.

The unintended consequence of the good intention of an ATA is that a wage of £120 a week (£6,000 a year) becomes a cost of £8,600 to the employer because of 20% ATA fee plus 20% vat.

9 Additional administration

Despite what they tell you, the process is not admin free.

You have to provide job descriptions, post a vacancy on the NAS website via your training provider, study applicant profiles received, short list for interview, interview (expect 50% to fail to even attend the interview), offer the position, set up payment arrangements etc.

Don’t forget to provide policies on health and safety, employment without discrimination, Equal Opportunities, a First Aid box, a Health and Safety risk assessment, an H & S poster for the wall and a copy of your Employers Liability insurance policy.

10 Other realities

In all likelihood, £300 for compulsory Employers liability insurance, (you don’t need it just for yourself) £700 for an additional computer, £300 additional cost for phone, tea and coffee and then travel  expenses, possibly a new desk … and chair … and  Total £3,000.

On top of which you have to train the apprentice too.

If your own fee rate might bring in £50 to £200 an hour (as a painter, electrician, accountant, business consultant, solicitor) there is a real risk you will actually lose money by taking on an apprentice.

Your minimum opportunity cost of spending 1 hour with your apprentice is around £20.

Unlike larger businesses there is no one else to do the training for the one man band.

Even with 5 employees, most will be getting around £10 an hour or more.

Larger organisations, particularly large retail chains, will have someone earning below £10 an hour that will do most of the day to day training for the new employee.

For the reasons stated above, it comes as no surprise to me that businesses with over 250 employees (and more so up to the apprentice eligible maximum of 999 employees) grasp a £3,000 take on incentive, plus no fees from external training for 16 to 18 year olds, with enthusiasm.

However, it is also no surprise to me that hardly any micros (fewer than 10 employees) take on an Apprentice.

In policy terms, the current Apprenticeship arrangements are biased in favour of larger businesses and against smaller businesses and in a period of low economic growth with larger employers shedding or not replacing staff, this may be counterproductive if the main policy objective is to increase employment and work in the private sector.

Although I have gone ahead with a 3 month intern plus a 12 month apprentice, my head tells me this will make my business “Not for Profit” but my heart tells me someone needs to do something about the 1.3 million 16 to 24 year old NEETs not in Employment, Education or Training.

Six months in, I am just about to break even going forward but looking back I never realised what the true cost would be.

Managing people, simply spending time explaining what you do as a business and what you want your apprentices to do for you, takes lots, and lots of time. Induction is a long process and often needs repeating.

My rant is that the only way you will get buy in from micro business owners is to pay them at least £6,000 a year to take on an Apprentice – after all, they have the apprentice for around 30 hours a week compared with a college at 4 hours a week – and the college gets paid around £4,500 or in school, £5,600 a year for nurturing a 16 to 24 year old and Universities get even more for educating / training 18 years and over undergraduates.

Given the millions of people running Micro businesses and their importance to the economy, the time has come to take them out of the SME category (covering all businesses from 0 to 250 employees) and appoint a Minister for Micros who understands this important group of people and what they really need from Government to get the economy moving.

If I had my way, I would exempt Micro businesses from around 90% of Health and Safety and Employment legislation; raise the Vat threshold to £100k, the NI and tax PAYE threshold to £20k a year and see a new economic boom.

What do you think?

End Quantitative Easing and Tax Bank Bonuses at 70%

The blame for partial collapse of the world financial system since 2007/8 seems now to lie heavily on the banking sector for reckless lending and excessive trading in financial derivatives, which few people, including bankers, fully understood.

Yet, despite the blame and criticism, Governments have continued to favour the banking sector with initiatives like Quantitative  Easing, which, again, few people understand and bank shares have again risen in value along with bank profits and bank bonuses are again at high levels.

See below for help from BBC website on QE.

As I understand QE, the Bank of England effectively makes cash available to other banks (at very low or no interest) so they can lend this money on to “real” businesses.

This is all in the interests of the so-called “lack of liquidity”.

It might be a slightly good thing to do if:

1)   It was the right thing to do

2)   It worked

Firstly, I don’t think it is the right thing to do, as I don’t see the problem being one of liquidity but more a problem of solvency and confidence.

Many companies and sovereign wealth funds are sitting on lots of cash but not investing it because they are not yet convinced now is the right time to take risks and invest.

This fear is based on many factors including:

a)   Uncertainty about the viability of the Euro as a currency

b)  Fears of high inflation

c)   Fears of more big banking defaults to come

d)  Uncertainty about growth rates in the emerging and established economies

This is hardly surprising. The problems in Euro land have not been solved, just postponed. Austerity programmes in Greece, Cyprus and Italy have lead to additional political instability and public outrage.

Adverse / uncertain weather conditions plus speculators have confused future food and raw material price expectations.

In UK, the black holes at COOP Bank and the debate about banking reform are unsettling.

Conflict in the Middle East, Africa and parts of the Far East and South America plus feelings of concern over the strength and stability of the Chinese economy are not helping.

Secondly, the banks have not used the extra cash made available to them to lend on to the right activities in the “Real Economy”.

Instead they have kept some of the cash to boost their own reserves and balance sheets (at the command of the Government), some to provide additional lending to existing “basket case” and “zombie” clients to delay collapse and administration and the balance has mainly gone to businesses in the financial sector.

The banks and financial institutions have also done well out of funding increased Government debt evidence by the rise in Government spending and the state deficit plus an increase in the National Debt.

I don’t really get the model where the B of E prints more money, gives the cash to banks without charge, then pays the banks to borrow the same money to meet the state deficit!!!

The other banking myth that has been demolished is the idea that salaries and bonuses have to be high to attract the best talent.

The number of resignations from the top of the talent pool of cheats and fraudsters and snake oil salesmen and the resulting glut of an estimated 100,000 unemployed bankers in the UK alone does not seem to have depressed wages.

There is no lack of supply to fill top positions in banking. If the Free Market worked properly then salaries should be falling shouldn’t they?

So, let’s tax the rich banks and bankers and give more to the poor who have a greater propensity to spend and boost the economy.

Oh, and while we’re at it, let’s cut back on silly infrastructure spend and poor / no return on investment spend in University and Academic research, particularly in the field of economic and social science research. But more on these subjects later.

Scrap spending on Motor Highways and Start spending more on the Internet Super and Broadband Highway and Digital Training.

BBC Online 13 February 2009  Quantitative Easing
The Governor of the Bank of England, Mervyn King, ……… the monetary policy measures introduced by the Bank will eventually “provide a significant boost to demand”.

…. These additional measures include so-called ‘quantitative easing’ or increasing the money supply. This policy has been used extensively in Japan and was something that the US Federal Reserve Chairperson, Ben Bernanke, also mooted. For his comments he was nicknamed ‘Helicopter Ben’ for suggesting the idea was like dropping dollar bills from a helicopter!

The Bank will buy assets from financial institutions, which might include government debt, bonds, mortgage-backed securities and possibly equities (shares). In doing so, the commercial banks are better able to lend money and so get the economy moving again. The process happens because of the relationship between the Bank of England and the banks.

All banks have accounts at the Bank of England, which are classed as ‘reserves’. When the Bank of England buy assets, these reserves will increase, which reduces the banks’ balance sheets? The Bank of England are hoping that banks will want to maintain their balance sheets and so they will lend more in order to do so.

Quantitative easing has been described as printing more money; the effect is that the money supply should increase, but the Bank of England will not be physically printing paper money; the increase is all in terms of book entry. The definition of the monetary base (M0) is cash – notes and coins held outside the Bank of England – and commercial bank reserves held at the Bank of England. Quantitative easing increases these reserves, so M0 will increase. The hope is that the increase in the money supply will find its way through to the real economy and lead to increased spending to boost aggregate demand.

One concern about this policy is that it might trigger inflation. The Bank of England are suggesting that inflationary pressures are falling and whilst the consumer price index (CPI) is still above the target level, it expects inflation to undershoot this target in the coming months. The risk of quantitative easing, therefore, is likely to be judged as relatively low.

Whether it will work is another matter. The experience of Japan between 2001 and 2006 did not seem to suggest that it was a massive success but, at the same time, the success of such a policy depends on when it is used and how it is used. The question will be, therefore, will the Bank do enough and at the right time?

12 March 2009 Quantitative Easing

The Bank of England …held a £2 billion auction to buy government bonds from banks. Fund managers and banks decided what gilt-edged stock (gilts) – so called because the original paper certificates had a thin layer of gold leaf around the edge – they should hold. It was revealed that the banks made offers to sell £10.5 billion worth of gilts. The auction was in two parts, the first in the morning was called a non-competitive auction. In this, the banks could make commitments to selling gilts but not set prices. Banks, it seems, were unwilling to put their toes in the water at this stage of the auction and there were no bidders.

At 2.15pm, the next stage in the process began. This was a reverse auction where banks submit electronics bids to the Bank stating what gilts they would be prepared to sell and at what price. This auction was oversubscribed by more than five times. This is the first day of a series of auctions……to inject £75 billion worth of cash into the financial system.

Having bought the bonds, the Bank will be hoping that the cash injected will find its way through to lending to businesses and individuals. The housing market is still suffering, for example, and there have been reports that despite houses being available for sale, the log-jam was in the inability of some people in the market to get mortgages.

Since the Bank’s announcement that it would be adopting quantitative easing, demand for bonds has, unsurprisingly, risen. The price of the benchmark 10-year gilt has risen by up to 20% in recent days as a consequence. The relationship between bond prices and yields is an inverse one, so yields on 10-year bonds have fallen to a record low. In September 2008, yields touched around 4.75% but have now fallen to around 2.95%. 

Cut Pensions and Health Budget Now.

It seems my views are in advance, but in line, with an increasing number of commentators.

The treasury and Prime Minister must undo the ring fencing for Pensions and Health so better activities can be supported to boost the economy.

STOP THE GROWTH

The time has come to stop the ever-growing expenditure by the state on Pensions and Health. We must also abandon the idea of state spending in these areas being maintained in real terms.

The budgets are already massive and need to be reduced as a percentage of Government Spending and as a percentage of GDP.

State Pension payments for financial year ended 2012 were £ 74 billion, out of a total Welfare bill of £160 billion, 47%.
State pension payments will continue to rise in the absence of a change of policy, another plague or a nuclear war.

NATIONAL INSURANCE MYTH

The myth that we have paid National Insurance contributions so we have already saved for our pensions is utter rubbish.

The fact that we still have NI as a separate payment is not only ridiculously inefficient but also a disgraceful deception of the fact that every state pension paid out today comes from current tax receipts and other government income

I am not saying that expenditure on Health and Pensions should remain static, only that STATE expenditure should remain static.

If people want to pay for improvements in their own pensions or health treatment that’s great, but I want to stop the state acting as a cash transfer agent between different sectors of the community.

NATIONAL DEBT

The National Debt continues to rise, as do the interest payments on it, £48.2 billion last year alone, leaving our children with even greater burdens as years go by.

We can no longer avoid the need to cut state pensions, public sector pensions and pensioner related benefits and increase taxation.

The trouble with FREE services at the point of use like the NHS and under-funded pension schemes for public sector workers and the standard national state pension for ordinary people is that the people who pay and the people who receive are not identical.
The cuts need to be substantial, around 5% and matched with a freeze on cost of living / inflation increases for the next 3 years plus, in my opinion, a selective increase in VAT on stuff mainly purchased by those on higher incomes (cars costing over £100,000, yachts, domestic accommodation over £3 million in London and £2 million elsewhere, bankers’ bonuses, salaries and profits, red corduroy trousers for men etc).

What do you think?

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