'Munibonds' and the national debt

Bad news from the Telegraph's daily email:

Local authorities are on the verge of issuing bonds in order to raise revenues and make up for further cuts to their government grant.... The "munibonds" will be issued by a new municipal debt agency, and are backed by 48 local councils and the LGA. Scotland will also acquired the powers to issue its own debt in what have been dubbed "kilt-edged bonds".

Why is it such bad news? Shouldn't government be allowed to borrow, for investment, like the rest of us? Few of us could buy a house from our savings: instead we take out a loan. So why should a local authority – or even a country – not borrow to fund its schools, roads and care homes?

I used to read eighteenth-century authors and economists like William Cobbett (of Rural Rides) and Adam Smith (of The Wealth of Nations) and chuckle to myself as they went on and on against the idea of the national debt. Much of the huge rise in prosperity of our times, I supposed, had been built on debt, much of it government debt taken out to fund market-enhancing improvements in roads, bridges, airports, schools, hospitals and housing.

Now I think the Cobbetts and Smiths were right and I was wrong. If we could rely on governments to make rational, objective decisions about the overall benefits and costs of infrastructure finance, then there might be a case for allowing them to borrow for public investment. But we cannot rely on governments to be so dispassionate and high-minded. The very power to borrow is itself too much of a temptation pulling them in the opposite direction. Consider, for example:

(1) It is impossible enough to measure the 'public' benefit of government spending, when there is no such thing as the 'public interest' – only a clash of opposing interests. (Think airports, and the convenience for travellers of extra flights and the distress of local residents over traffic and noise.)

(2) The problem is compounded when it is confused by electoral interests. (As Khruschev noted, "politicians will build a bridge, even where there is no river." All the more so, if there is an election coming up.)

(3) With electoral advantage in mind, it is too easy for those who control the public finances to segue from investment to spending. As Chancellor, Gordon Brown, to his credit, said he would confine borrowing to investment projects. But by his reckoning, anything spent on schools or hospitals was 'investment' for the future – even though much of it was patently simply consumption for today.

Such factors help explain why governments have growth so much, and spend money on so many marginal activities. It is too inviting to spend now, earn the applause of the public, and let the next generation, who do not yet have a vote, foot the bill for it all. Public Choice economists call it 'time shifting'. And in that, of course, the public themselves are complicit. With interest groups, from pensioners to patients, demanding more spending on themselves, and politicians happy to borrow, at little cost to themselves, to provide it, how can we ever expect prudence in the public finances.

It is a draconian answer to say that we should stop government borrowing at all. But actually, the eighteenth century thinkers were right.

Local government cuts needn't be the end of the world

Local governments are having their spending power cut by 1.8% in real terms next year. Local councils pay for things like social care, some education, public transport and roads, and some of the arts. So this cut is not so popular in some quarters.

I hate relying on ‘waste cutting’ as a way of making spending cuts, but local councils really do seem to waste a lot of money. Since 2010 they’ve made £10bn in efficiency savings, and a third of councils say they can make bigger savings. I’m sure at least some of the other two-thirds are just being shy. The Local Government Association estimates that local governments can continue making efficiency savings at between 1 and 2 percent per year. So that’s something.

The big spending items are social care and waste spending. Both of these can be reformed so that people who can afford to have to pay for themselves. Waste collection is often contracted out, and there is academic evidence that doing so results in significant cost reductions. (There’s an easy way for councils who do not already do this to save some cash.) But more significantly there’s no real reason that more of the actual payments for this should not be moved to private residents as well, at least those who can afford it. 

Social care is much trickier and, as the population gets older and lives for longer, paying for it is becoming a bigger and bigger problem. Those people who can afford to pay for their end-of-life care should do so, but there is the problem that this disincentivises saving. Nevertheless it is hard to see a case for people who live in social housing and earn low amounts of money paying for the end-of-life care of people who own the big houses that they live in. Reforming this wouldn’t solve problems in the short run, but it might help stave off a bigger funding problem in the medium run.

Normally everyone focuses in on arts funding. In my view, there is no role for government in arts funding at all. I won’t convince you of this here, but Pete Spence might. And there are all the weird little things that local governments spend their money on that could be cut to save even a tiny bit of money. Where I live, in Lambeth, half the adverts I see seem to be thinly-veiled political campaign posters (paid for by me and my neighbours).

And, funnily enough, there’s one way councils could raise quite a lot of money and solve another problem in the process. The country needs a lot more houses, and planning permission is the main thing standing in the way. In some parts of the country, a piece of agricultural land that gets planning permission rises in value by one hundred times. Councils should be allowed and encouraged to auction off development rights for new houses. That would raise money for them and help tackle the housing shortage.

The problem here is that housing demand is not equal across the country, and it’s the richer places like London and the south east that would benefit the most from this. So there’s probably a case for some minority fraction of the money raised being redistributed to poorer authorities. In general I like the principle of council funding redistribution from rich to poor parts of the country, but that does reduces the incentive for councils to improve the economic prospects of their own areas. Though perhaps they lack the powers to do this anyway.

We have a government deficit that most people want reduced, some very large areas of central government spending that most people want increased (pensions, healthcare), and a general consensus that economic growth is a good thing (so tax rises are out). Something’s gotta give and there is almost nothing that can be cut painlessly. But given some willingness to reform alongside cutting, local government cuts could be the right way to go.

Are our children safe with Children’s Services?

The great majority of those who work in local authority children’s services do the very best they can in very difficult conditions.  They suffer abuse from the parents with whom they deal and the media, poor management, criticism from Ofsted and, from their perspective, inadequate resources.  What’s more, neither they nor anyone else know how well they are performing. In 2003, the Laming Report made a huge number of recommendations.  The body of their report made it clear that there was too much process (bureaucracy) and too little time with the problem families.  Performance was assessed by activity (paperwork) and not by outcomes; the body of the report called for that to be reversed.  But outcomes did not feature in the actual recommendations which, ironically, focused on increasing the bureaucracy and made matters worse.

In the eleven years since, government has recognised that performance should be measured by outcomes and some limited progress has been made, e.g. for adoption services.  But where child protection is concerned, we simply get lip service.  No outcome measures have been suggested, nor the specific metrics, nor how they should be gathered.  In short we have no idea what “success” in child protection would look like or which local authorities are doing better than others.

When, last month, I asked the Children’s Department Minister, Edward Timpson MP, about performance measurement in this area, the answer was that they had turned the whole matter over to Ofsted.  The rest of his letter discussed the bureaucracy involved but there was not a word about how performance should be assessed.

This is, of course, a cop out: Ofsted should measure performance against standards set by government, as it does for schools.  Government is responsible for specifying what it wants in return for our money.  How else can they know whether to spend more or less?

Both Ofted’s “Framework and evaluation schedule” (published this June) and Rotherham inspection (published last week) have many references to the importance of measuring outcomes but nothing about what outcomes should be desired, what the metrics should be nor how they could or should be collected.  One has to feel some sympathy for the Rotherham local authority for being chastised for failing to do something that no-one has explained, not even the Department responsible.

Our children may or may not be safe with Children’s Services.  The bigger question is whether they are safe with this government.