Pickles doesn’t get the need for capital

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The Guardian has reported that:

The communities secretary Eric Pickles today accuses councils of squirreling away cash while simultaneously making thousands of job cuts and plans to slash services as he reveals that town halls are currently sitting on £10bn in reserves.

The government's unprecedented step of naming and shaming councils with the biggest reserves is a stark warning to local authorities hoping to make a last-minute appeal to protect their budgets from the worst of the cuts.

It’s extraordinary that Conservatives are quite so stupid. You would have thought they’d understand how organisations behave. They do, after all, claim to have a business orientation, but time after time they show themselves quite unable to comprehend the reasonable behaviour of the organisations to whom government devolves responsibility.

Every organisation that has responsibility for employing people, for supplying services and for maintaining any form of capital base — and here I mean real capital, such as land, equipment and so on — needs reserves.

I well remember when I was chair of governors of a school in Wandsworth. The council (Tory, of course) told us we have repairs we had to pay for amounting to well over £100,000. The total school budget was £500,000 a year or so at the time — and after teaching costs (a fairly high priority for a school) there was about £20,000 or less over which we had any discretion to cover repairs. So we began to build up a reserve to cover the major spend that was needed — which had to take place on one occasion or the whole budget would have been absorbed in the cost of repetitive scaffolding hire -  and then got told that if we did the excess would be removed from our budget the following year. They even did that if we carried forward a reserve to cover specific costs — like seeing through employment of a teacher to the end of the school year.

Pickles is clearly made in the same mould. He has no idea that those responsible for organisations need reserves, to see through their responsibility to staff, to ensure they can cover major capital or repair costs, and to cover the unexpected (like the impact of having their budgets cut by central government). And the more organisations involved in delivery of services the bigger the required reserves because the opportunity to self insure against risk — which central government has but few others can afford — goes up as diversification of supply increases.

This is a hidden cost of the ‘Big Society’. It’s also a massive hidden cost in the NHS reforms where the number of delivery organisations is increasing from 150 PCTs to more than 500 GP consortiums — all of whom will have to create their capital by not spending their budget allocations.

And if they don’t then they’ll be penalised — NHS accounting is incredibly harmful to those that run deficits.

If the ConDems don’t get this they show a remarkable lack of understanding that makes them unfit for government.

But I guess we already knew that.