www.taxpayersalliance.com PAYING FOR THE CREDIT CRUNCH Sharing the proceeds of thrift William Norton Foreword by Matthew Sinclair Contents Foreword by Matthew Sinclair 4 Preface 5 Executive Summary 7 Abbreviations 9 Chapter 1: The spiral of instability in the public sector 10 Chapter 2: Previous reforms of the machinery of Government 16 Chapter 3: How much waste is there? 27 Chapter 4: Paying for the credit crunch 41 Chapter 5: How to reform Government 57 Appendix I: Changes in the size of the Government 62 Appendix II: The machinery of Government today 68 Appendix III: Ministerial departments 78 Appendix IV: NMDs and Parliamentary bodies 106 Appendix V: The Quango State as at 31 March 2007 129 Appendix VI: The structure of the public finances 131 Appendix VII: How to hide civil servants 139 43 Old Queen Street, London SW1H 9JA www.taxpayersalliance.com 2 0845 330 9554 (office hours) 07795 084 113 (media – 24 hours) About the authors William Norton , author of the report, is a qualified solicitor with over fifteen years experience providing tax and business advice in the City of London. He has been on the advisory panel for tax affairs and legislation to the Conservative frontbench since 1998. William was a member of the permanent staff of the James Review on Taxpayer Value (2004-5) and wrote the reports on Defra, DTI, the Department of Health and the Home Office. He was subsequently attached to the Conservative Party Policy Unit and oversaw the Kill Or Keep Review of quangos and the drafting of the Deregulation Bill proposals. William was also the Referendum Agent for the victorious No campaign in the North East Regional Referendum. He is currently a trustee of the Social Affairs Unit and a borough councillor in Worcestershire. William is the joint author (with Charles Elphicke) of The Case For Reducing Business Taxes (CPS Perspectives, 2006), and the sole author of The Machinery of Government (And how to reform it) (ConservativeHome.com, 2006), Flatlining: Analysing the institutions running the NHS in London (TPA, 2006) and White Elephant: How The North East Said No (Social Affairs Unit, 2008). Matthew Sinclair , author of the foreword, is the Research Director at the TaxPayers’ Alliance. Since joining the TPA in May 2007, he has produced major reports on government capital procurement, environmental policy, NHS performance, the dynamic effects of corporate tax cuts, the economic and social burden of crime and the effects of aid policy, among others. He frequently represents the TaxPayers’ Alliance on the television and radio, particularly in response to the economic crisis. 43 Old Queen Street, London SW1H 9JA www.taxpayersalliance.com 3 0845 330 9554 (office hours) 07795 084 113 (media – 24 hours) Foreword Britain’s public finances are facing a near perfect storm: Over a decade of big increases in public spending – mostly wasted by unreformed public services rather than putting in place essential infrastructure; tax revenues collapsing as the financial services firms that have powered the British economy are in free fall; a government set on responding to the crisis with crass Keynesian fiscal stimulus and rising demands on the state as unemployment increases. Increasing the tax burden, after massive increases in recent years, is more likely to add to our woes than relieve them. In particular, increasing the burden on business could be catastrophic for our already weak economy as global corporate organisations are in a state of flux and firms can easily locate any new investment, or save jobs, elsewhere. While Britain’s involvement in the war in Iraq may be coming to an end, the war in Afghanistan rumbles on and, with shortages in key equipment, any savings in the defence budget are likely to be ploughed back into keeping soldiers alive. Even before the present crisis set in, the public had come round to the idea that spending needed to be curbed so that their tax burden could be brought down. Opinion polls showed a solid majority behind cutting public spending and then bringing down taxes in turn. It may be, though, that we will increasingly face a choice between choosing to cut spending now and being forced to cut spending when financing massive deficits becomes untenable. In that context, it is vitally important that every consideration is given to how we reduce public spending. At the TaxPayers’ Alliance, we’re keen to publish the work of authors whose views might inform politicians and members of the public who want to reduce spending and build the conditions for lower taxes now and in the future. In this report, William Norton uses his policy expertise, built over decades including being one of the key brains behind the James Review for the Conservative Party, to presents a case for re- organising public services. He sets out, in unparalleled detail, why an aggressive waste-cutting Government can and should ease the pressure on the public finances. Matthew Sinclair Research Director The TaxPayers’ Alliance 43 Old Queen Street, London SW1H 9JA www.taxpayersalliance.com 4 0845 330 9554 (office hours) 07795 084 113 (media – 24 hours) Preface In 2006 Tim Montgomerie, concerned at the escalation in government spending, asked me to write a paper for his ConservativeHome.com website summarising my work on waste in the public sector for the James Review of Taxpayer Value. The result, called The Machinery of Government (And How to Reform It ), duly emerged and, given the then climate of opinion, duly disappeared from view. I had summarised the scope for cutting government waste with the conclusion that “ It becomes a matter of political judgment and human nature (unless economic reality interrupts proceedings) .” Well, since then, economic reality has interrupted proceedings with a vengeance. We have had the final efflorescence of an unstable boom, the flailing incompetence of a moribund government, a credit crunch, a banking crisis, a stock market crash, and now the spectre of world recession stalks the globe. It seemed worthwhile excavating my old paper and revising it in the light of current market conditions. Human nature has probably not changed much since 2006. What about political judgment? Sharing the proceeds of growth, the stance that government spending should rise more slowly than the economy grows, is a perfectly fine economic policy. It is the policy on which the Conservative Party fought the general elections of 1997, 2001 and 2005 (although these days the slogans are sharper and they are accompanied by fewer figures and graphs). It is unclear now, and was never discussed then, what would happen if there was no growth in the economy. In a sense, this does not matter now. The debates of the 1970s and early 1980s turned on the trade off between inflation and unemployment. Those of the late 1980s and 1990s concerned the relative merits of privatisation and state provision. Today the dilemma has become the right balance between stimulating growth and paying for the cost of government. As it were, we need a policy for sharing the proceeds of thrift. Irrespective of how any UK government decides to respond to the crash of 2008, whoever holds power will have to face one overriding imperative. Cutting the cost of administering government is now the only game in town. Money will be so tight that, whatever the government plans to do it, it cannot afford to fritter any away on the seraglios and harems of Whitehall. This paper sets out how to axe the eunuchs of the quango state, and why this must be done. You have a choice. Mrs Thatcher famously said that “ there is no alternative ” to her policies. She was wrong. In politics there is always an alternative. The programme which I outline in this paper will be at first unpopular, difficult, and slow. Gordon Brown is fond of attacking his critics as advocates of doing nothing. He prefers dramatic and drastic action – any action, so long as it is dramatic and drastic and, of course, expensive. But he is the 43 Old Queen Street, London SW1H 9JA www.taxpayersalliance.com 5 0845 330 9554 (office hours) 07795 084 113 (media – 24 hours) real advocate of doing nothing because he is willfully ignoring the structural defects of the system over which he presides. It is always open to our government to choose to do nothing about these fundamental defects. And then, after a few years, we will all be eating grass. William Norton March 2009 43 Old Queen Street, London SW1H 9JA www.taxpayersalliance.com 6 0845 330 9554 (office hours) 07795 084 113 (media – 24 hours) Executive Summary Since 1997 there has been a substantial increase in the size of Central Government without a corresponding increase in efficiency or productivity: In June 1997 there were 472,412 full-time equivalent civil service posts. By December 2007 this had risen to 498,960. This obscures the true extent of the state payroll. In March 2007 there were roughly 2 million people employed by government departments or quangos, excluding frontline staff. Adjusting for various attempts to fudge the figures, there were 1,814 public bodies operating in England or on a UK scale in 1998. On a like- for-like basis, by 2007 this total had risen to 2,247. The post-war governments that offered the most radical policy change were often the most cautious in terms of reforming the machinery of Government: The Attlee Government essentially took over a machine designed to subdue Nazism and tilted it towards subduing capitalism but did not change the fundamental structure. Thatcherism, too, was more about changing policy than changing structures. By contrast, the theoretical basis for British Government was formed by Lord Haldane’s Report of the Machinery of Government Committee under Lloyd George’s Government.