What to tackle – government revenue or spending?

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Dennis Hewlett at AccManPro has been seeking to engage me on the issue of government spending. I have been reluctant to respond as he would wish. The reason is simple. He seems willing to promote websites that have a view of government that is, in my opinion, critical and unhelpful.

I do not share that approach, even if Dennis has sought to call my own 'lop-sided'. Since I start from the premise that the market has an essential role within the economy, and that there are great many activities for which it is the obvious or only economic supply mechanism I clearly do not have the biased view of those sites he has sought to reference which appear to only be capable of abusing government and all engaged in its service. The fact that I also believe that government alone is the best, or on occasion the sole able supplier of some other services suggests, I think, that mine is not a lop-sided starting point, but one that is balanced. I hope so. I genuinely feel that the mixed economy works best.

That being the case, I have refused to engage in debate with those who seek to abuse government for one simple reason. I think it extraordinarily unhelpful. It is my experience that quite extraordinary people work for both government and business. And each have their fair share of both dullards and laggards. Inspiration is common to both. And so are mistakes. In fact, it's quite easy to find matching pairs. In the case of the NHS IT system debacle just look at Sainsbury's distribution IT fiasco, which left one of the largest supermarket chains in the UK with massive gaps on its shelves whilst product rotted in warehouses and you'll see the similarities.

As I have explained here before, I find this easy to explain. Large organisations operate almost independently of their ownership structures. As a consequence what is noticeable about the state and large companies private sectors is what they have in common and not what divides them. That is the premise from which I might start any consideration of state spending.

After which I would seek to objectively determine how big the problem being addressed might be. Recent reviews have put varying values on the degree of inefficiency in the UK state sector. The Gershon Review estimated this to be £21 billion. The Conservatives James Review estimated waste to be £35 billion. Some, such as the Taxpayer's Alliance suggest the sum might be £80 billion, but their methodology is so flawed that their work could not be taken seriously by anyone. Including all spending by Quangos as being, by definition wasteful (as they do) really does not result in credible conclusions.

A serious estimate of waste might therefore be in the range £21 - £35 billion. Let's call it £28 billion. In 2006/07 total government spending is estimated to be £552 billion (source: March 2006 Budget Report). That means 5% of government revenue might be saved by judicious reviews of spending by government.

Now let's put this in context. First of all, as almost any procurement specialist will tell you, there's almost no person or company in the UK (or elsewhere) who could not save 5% of their current budget by more judicious management. I've certainly never arrived in a company as a consultant where I have not found that to be possible. So I'd actually suggest government, whilst not being as efficient as it could be (which is, of course, always going to be a statement of fact) is doing pretty well overall on this basis. 95% right is a good score.

Secondly, if I have a choice as to where I think my activity could be focused I can either look at the income or spending sides. With the resources I and my colleagues have available I doubt we can seriously cover both right now. And the losses on the revenue side from the combination of avoidance and evasion are clearly much larger. The VAT gap was, for example, hoped to be no more than 12% in 2005-06. Given the rise in carousel fraud it was probably more. But let's stick with 12%. That means in relation to spending the gap is about £75 billion (£552 billion x 100 / 88 - £552 billion). There are plenty of estimates that put it higher than this.

So which is more important? £28 billion of savings or £75 billion of extra income? Well both are, but if a choice has to be made it's obvious which to go for if you are interested in spreading the burden of taxation fairly and in cutting it for everyone. I'll be sticking to the Revenue side and in the meantime might ask the obvious question, which is why are those on the right emphasising the less important one? What is their agenda in doing so?


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