Too small to fail

Perhaps this blog ought to be called ‘Too Small to Succeed: Too Important to Fail’.    The saga of the small District Councils the sustainability of which has been called into question by cuts in Government grants rumbles on. 

I wrote a few weeks ago about West Somerset, the nation’s smallest District  Council which has revealed that its finances are unsustainable in the long term because the pressures for growth on its expenditure cannot be matched by an increase in income.   This is the problem for the whole of local government in microcosm unless grants one day start to increase again, although some lucky authorities with growing Council Tax and Business Rates tax bases may escape the ultimate consequences.   The smallest Districts are hit first because their overheads are highest in proportion to overall spend.

 

Since what may become known as the ‘West Somerset Question’ was posed, the Government has come up with its chosen solution, which it is reported is to suggest West Somerset become a commissioning Council, outsourcing provision of services to others and reducing its overhead costs to a minimum.

This kind of things works- up to a point.  Clearly larger providers, such as neighbouring authorities or the private sector  can spread costs more easily and arguably the private sector has more acumen and more leverage when it comes to reducing costs.    But this can only be a temporary solution if austerity continues because it does not address the fundamental issue of growth in demand outstripping growth in income. 

Which underlines the problem, not just for small Districts but for all local authorities, that the often expounded solutions such as outsourcing and shared services in themselves do not do much more than buy time. There are limits to what even the most enterprising provider can do to keep making services more and more efficient.  Two other downsides to arms length provision- the cost of contract management and a risk of loss of democratic accountability are worth mentioning in passing and perhaps we will return to them in the future. 

Economists make the point that service industries, being people based, find it difficult to become more productive other than by managing access channels and moving to greater self-service.   Thus the doctor no longer visits you; you visit the doctor, and the bank offers better terms on investments if you agree to manage the account online.   Productivity improvements in services come from redesigning processes and asking people to do more for themselves.   This is the way forward, in my view, but in the public sector there is a limit to the pace at which this kind of change can be accomplished, the main blockers being ‘The Two V’s’ –the vulnerable… and votes.  

That doesn’t mean arms length providers are not worth considering, of course, because bringing in commercial expertise and the capacity to innovate can help find the longer term solutions, but simply changing the name of the provider is not going to be enough.

Just because a local authority is small in size doesn’t mean that is not vital to its community, and it would be shame if local authorities were forced to become less local in order to become more efficient.  Chubby Cat’s initial suggestion for the small Districts, which was to provide extra grants subject to the small authorities showing they had taken certain efficiency measures has been scotched by Government.  No more money.  Instead we have a solution which kicks the can down the road again – perhaps far enough for the economy to recover and bail us all out. Let us hope so. 

The public sector is built on moral foundations

With resources dwindling, the moral questions behind public spending and taxation have been thrown into sharp relief.   It must always be remembered that the post war consensus known of Butskellism, which has been a feature of most of Britain’s history over the last fifty or sixty years, was formed in an environment of relative prosperity.   As we move through a period of austerity the moral differences between left and right become more evident.

In the last couple of weeks, for example, we have heard the Public Accounts Committee talk about the morality of companies avoiding tax and, just last week, Chancellor George Osborne told Councils that putting up Council Tax is morally unacceptable.  The inference that all politicians who advocate the opposite position are therefore immoral represents a raising of the stakes in political rhetoric.  Will the next General Election campaign be about politicians trying to out-moralise each other?

This is an awkward one for public servants, who are supposed to be politically neutral.  Would George Osborne have me question my own morality before I advise politicians to put up taxes, or am I entitled to set the moral issues aside and think solely about the cash? 

With all that in mind perhaps public servants should be thinking more about the moral side to public provision and how we pay for it.  To help us, the psychologist Jonathan Haidt and his team believe they have discovered the foundations of human morality. Inherited from man’s earliest ancestors who lived for generation after generation in extended family groups,  these are the psychological traits that supported this way of life and are still the basis on which human cultures are built.

The six foundations, wickedly paraphrased for the sake of this blog, are;  care for others; a sense of fairness, a desire for liberty, group loyalty, respect for authority and a sense or purity or sanctity. 

Without going into too much detail (there is a great deal of good stuff on the internet for those who are interested),  genes that support these traits have survived in the gene pool because they help human beings work together and optimise survival rates.  Groups that didn’t look after each other, that turned in on themselves too easily and that weren’t competitive enough with their neighbours dies out.  Hence the moral foundations exist, Haidt believes, in every human population anywhere in the world.

Of course the moral foundations are only genetic tendencies, and like all other such tendencies, they are shaped and moulded by culture, religion, upbringing, experience and, last but not least, freedom of choice for the individual.  

This is important because, fairly evidently, there are moral dilemmas implicit in the moral foundations. Group loyalty and care for others, for example, works best when the people we are called upon to care for are inside the group.   A strong commitment to group loyalty also explains why we have a tendency to be antagonistic towards people different from ourselves, to a point that often descends into violence.   But going to war sooner or later kicks up the dilemma of when to stop trying to kill the other side and when to show mercy and compassion to the wounded and displaced.  Culture and religion attempt to solve these dilemmas and not surprisingly they are solved in different ways in different populations.

One of Haidt’s fascinating pieces of work around the moral foundations studied how people with different political views take different practical attitudes to the six moral foundations.  ‘Conservatives’  tend to have more respect for authority, greater group loyalty and a greater sense of what is pure than ‘liberals’,  for whom care for others and fairness tend to trump everything else.

But the implication of this is that the stuff of politics is not in the moral foundations of the human species, which are universal, but the way cultures and individuals interpret them.

It seems that pretty much everything the public sector spends money on, and hence for which we pay our taxes, appears to have a basis in one or more of the moral foundations.  Economists may justify public expenditure in terms of  such matters as market failure and the need for public goods, but these are not the kind of things people think about when they pay their taxes.   It is likely that the broad consensus we have over what things we are prepared to give up some of our earnings to pay for is based on some fundamental agreement amongst ourselves over what is morally right.

I am not yet sure what the implications for moral foundations theory might be for the public sector, but I am pretty sure that if the theory turns out to be true they are there to be found.  There has already been a piece of work designed to help charities use moral foundations to improve giving.

I will continue to permit myself a wry smile from the sidelines when I hear politicians talk about morality., but if this debate leads us all to give more consideration to moral questions then it won’t be a bad thing.

Merry Christmas to all my readers!

The morality of taxation is a taxing issue

The economic news in the UK before this week’s Autumn Statement was about the morality of tax avoidance by companies.    Chair of the Public Accounts Committee, Margaret Hodge, was widely quoted, coming down particularly hard on what she called ‘completely and utterly immoral’  tax avoidance schemes.

As a seasoned politician Hodge is well aware of the value of a sound bite, but her full comments were measured and realistic, suggesting that Government should be more aggressive in testing the law, negotiate harder where this was called for, simplify the tax laws and make sure there is more transparency in the tax dealings of companies.

Nevertheless the idea of the ‘moral company’ is worth reflecting upon.      

After all, the limited liability joint stock company is not an institution that has well conceived if morality is the goal. The whole principle of the beast is that people get to take risks with other people’s money while limiting their personal liability, while the investors in the business get to take a morally ambiguous arms length position in relation to the decisions of its management. 

Allow for the fact that the shareholders in most traded companies are largely other companies and it isn’t hard to see why moral judgements as part of company decision making might be hard to achieve.

On the question of tax avoidance, a company’s management has a duty to optimise shareholder value, so it is hardly going to volunteer to pay taxes if it doesn’t need to pay them.  At the same time, shareholders, if they choose, can turn a blind eye to what the management may be doing.

But let’s put it another way.  Let’s say a Finance Director of a major listed company is in his private life a deeply moral man; he aims always to do the best thing, fastidiously teaches his children right from wrong, does a lot of work for charity, may even by a pillar of his religious community.   Let’s say that he does not leave his morality at the door when he comes to work but he also tries to live by his personal standards in all his professional dealings.

Let’s also assume that he has a simple choice – a certain amount of the revenue his firm makes either goes to government in taxes or it is paid to shareholders as a dividend. 

Which is the moral choice?  Pay the money to the Government where, let us say, it will go entirely towards building a better society for us all, or repay the investors for the risk they have taken – some would say the faith they have shown- in financing the company?  On the face of it are they not both deserving causes? 

Of course I realise there will be plenty of people who take exception to this over-simplification but what I think it demonstrates is that what is moral in relation to commercial decision-making probably depends on your point of view.  Do we have a shared view of morality in relation to these complicated issues?

Margaret Hodge is right when she imputes responsibility for resolving the puzzle to the Government.  The Government is elected among other things to reflect society’s view of moral boundaries and its job is to make the case for taxing large corporations,  to make the tax laws as watertight as possible and to demonstrate transparently that the tax revenues raised- along with all other tax revenues – are used, if you like, for ‘moral’ purposes.

But companies also need to demonstrate that they work to high moral standards as most people would recognise them, and perhaps a bit more transparency in the dealings of public companies – an extension of the Freedom of Information Act in relation to the private sector's dealings with the public sector,  for example- would not be a bad thing.    

Planning for the Apocalypse

A couple of weeks ago, I wrote about the case of West Somerset, England’s smallest District Council which, an LGA report says, will inevitably become financially unviable within a few years.  

The problem for West Somerset is that its capacity to raise additional cash in the teeth of further funding cuts is not sufficient to meet the growing costs of services.  No doubt there are people at CLG who would call this ‘apocalyptic’ but every time one picks up a paper these days, the end of austerity seems to be another year away. In those circumstances, sooner or later an authority is going to run out of wriggle room.

It begs an interesting question that we may need to broach more than once over the coming years; what happens if a local authority goes bust?

This is my view – and the disclaimer is that I am not a lawyer, and neither have I had the time to research the law at length, just to confirm one or two things I thought I already knew.   This is what I think.

The most likely way for a Council to get into financial hot water is to be unable to set a balanced budget.   Unless an unforeseen disaster occurs which leaves a local authority with unaffordable additional costs (in which case the emergency funding arrangements called the Bellwin scheme may well kick in),  local authorities are unlikely to become insolvent in the way businesses do.

There is no such thing as bankruptcy or administration for local authorities but if authorities get to the stage where they start to run out of cash and are sued by their creditors,  things will have gone seriously wrong with the alarm system. It’s much more likely that officers of the Council or its auditors will see the situation coming and warn that the Council is unable to set a legal budget. The threat should  normally be visible at least a year or two ahead.

If that happens, the chief finance officer is duty bound to issue a warning notice to the Council and for a period, until that warning notice is dealt with, all major spending decisions are on hold.

Imagining a situation in which the authority is unable to solve the problem itself, the threat of the commissioners is a sanction that gets mentioned from time to time. As far as I can see, Eric Pickles has no power to take over an authority just because it is in financial difficulties.  Indeed, this is a sensible way for the law to be framed because it could become an easy way out for local authorities to spend all the money and then throw the problem at Minsters to sort out.

The Secretary of State does have powers, on the other hand, to take over the running of services if the Council is failing to perform.    But is it sensible to wait for the impact of financial ruin to bite before intervening? 

If there is nothing the Council can do within the law to correct the financial position, which would be the case if the authority is financially unviable, then it probably won’t be long before everybody ends up in a room at the Department for Communities and Local Government, and the solution will come down to good old realpolitik- the English constitution at its best. 

But even this would be a failure in relation to authorities like West Somerset, whose problems have been highlighted several years in advance of impending doom, with plenty of time for Government – and it does come down to Government - to address the problem.

If the past is anything to go by, perhaps the answer for authorities like West Somerset lies in the local government finance system, with its seemingly endless capacity for tweaking, to produce the desired outcome.  The Isles of Scilly and the Corporation of London already have special grant arrangements because of their challenging size.  One possible solution is that small Councils will be given extra funding in some way, and that could likely be linked to some strings, such as a requirement to share certain costs with neighbouring authorities.

Of course, this interesting thought experiment leaves out several important groups of stakeholders, the authority’s staff, its contractors, and last but far from least, its residents and service users. The potential impact on these largely innocent bystanders underlines the importance of forward planning and West Somerset should be praised for doing its job in that respect.