Firstly – an apology, I had this drafted for the 70th anniversary of the NHS a few weeks back, but didn’t get a chance to finish it.  Part of the delay was because I distracted by things like holidays, but also because it turned out to be a bigger task than I thought.

Much bigger.

There are lots of on line campaigns and memes going around the internet expressing concern about the risk to the NHS of privatisation.  It’s hard to check social media without being asked to like and share some meme about the imminent risk to the NHS posed by Tories/Trump/Privatisation.  The quality of debate in the press isn’t much better

Over the last year these campaigns have reached a fever pitch around the NHS 70th Anniversary.  Increasingly these on-line campaigns don’t just want people to click and share, they want money to fund legal action against the current governments plans

One of the most eye-catching campaigns was the crowd funded legal action backed by Steven Hawking before he died to oppose the creation of Accountable Care Organisations.  The Stephen Hawking group was one of 2 campaigns to try and use Judicial Reviews to stop the ACO programme. 

Between them the 2 campaigns raised over £350,000 to fund legal challenges to NHS organisational configuration, on the grounds that they represented “privatisation by stealth”, or an extension of privatisation into areas like the commissioning of services which they hadn’t previously been allowed.  The costs to the NHS of defending these actions was very much higher.

Both campaigns lost their cases on all counts. 

As you might have guessed I was always doubtful of their chances of success.  The NHS has always had a mix of public and private provision since it was established, and each Secretary of State for Health gets to decide what the right mix is.  This isn’t a secret agenda, it is exactly how the NHS operates.

I should probably declare my own position up front on “privatisation”  I don’t really have a problem with private sector organisations working for the NHS where they provide good quality care, at a sensible price using their own resources.  When I was a PCT CEO I sent lots of NHS patients who had been waiting a long time for elective surgery to our local private hospital. I wasn’t embarrassed by this, and the patients who benefited certainly didn’t think that the NHS was being undermined.  

I do however have a massive problem with the huge bureaucracy which exists to support the transfer of work to the private sector, even though I got paid loads for years to be part of this bureaucracy.    I like some aspects of the ACO programme particularly as it allows local health economics to start and dismantle aspects of the NHS internal market.

But above all I believe that the Landsley Act is an expensive mess.  

I thought it would therefore be fun to write a short history of NHS privatisation to try and put the current debate in historical context, and to answer the crucial question – is the NHS privatising more or less than it used to? 

History of Privatisation

I have lost count of the number of memes I have seen shared on social media telling the story of how the plucky Attlee Government took on the Tory Party and the Medical Establishment, both of whom were dead set against the creation of the NHS, armed only with a massive majority in Parliament.

In fact both Labour and Tories supported the creation of some kind of National Health Service.   Arthur “Speak for England, Arthur!” Henderson, a former Labour Leader, and William Beveridge  (a Tory) did the work during WW2 to lay the ground for the creation of the NHS, although it the latter’s name which went on the report.

Despite this consensus there were fierce battles in the house over the 3 readings.  The main points of contention were:

1. Whether the NHS would be funded out of general taxation or from a separate fund (the Tories wanted a separate fund)
2. The Status and independence of existing healthcare providers, particularly GPs and healthcare charities.
3. How much of healthcare provision would be nationalised. 

When you read that wicked Tory MPs voted against the creation of the NHS, one of the most common issues that the Tories fought for in the 3 readings of the NHS Bill was protecting the status of pre-existing healthcare charities and guaranteeing their independence

The final 1947 Act put most of Secondary Care (sometimes called HCHS – Hospital and Community Health Services) in the public sector, and Primary Care (sometimes called FHS – Family Health Services) in the private sector.  I say most because some parts of the healthcare system were allowed to continue as charities independent of the NHS, for example Great Ormond Street, or the Richardson Hospital in Barnard Castle.   The NHS was funded out of central taxation, free at the point of use, and provided by a mix of public and private providers.   

It is worth noting that of the NHS principles Free at the Point of Use was the first to be broken.  The Attlee Government introduced co-payments for prescriptions, and later for glasses and dental work.   It turned out that the British had much worse eyesight and dodgier teeth than anyone had suspected.   Gordon Brown also technically broke one of the principles when he hypothecated the revenues from an increase in tobacco taxation in 2002, although this is such an obscure point that I am only mentioning it as I like the word hypothecated.  

There were however ideological grievances against the 1947 Act in both parties.  The right of the Tory Party have always wanted a larger role for the private sector in delivering secondary care services, and the left of the Labour Party has always been resentful of the independence of GPs (this bitterness got much worse after GPs enthusiastically embraced fundholding in the 1990s).  Each has their own agenda – to carve out opportunities for profit making on the right, and to clip the wings of bossy Doctors on the left.

Both in their own way were unhappy with the 1947 Act. 

From the 1940s through to the late 70s all the main parties followed similar patterns of policy and spending towards the NHS.   

And then came Thatcher.

Maggie Thatcher had an intense ideological obsession with privatising nationalised industries, and progressively sold off or smashed up all but one.  The exception was the NHS which was widely popular and had lots of support inside the Conservative Party. Thatcher promised voters in 1982, the NHS is “safe in our hands.

Thatcher still marked a step change in how the NHS was run.  The 1983 Griffiths report introducing Unit General Managers to run NHS Services which previously has been led by Clinicians.   The 1990 NHS and Community Care Act created an ‘internal market’ whereby Health Authorities ceased to run hospitals but “purchased” care from their own or other authorities’ hospitals. Some GPs became “fund holders” and were able to purchase care for their patients. The “providers” became were re-branded as NHS Trusts, who had notionally more independence.

This all amounted to a massive increase in management costs, and as the Berlin Wall came down large numbers of unwanted Cold Warriors were re-deployed as NHS Senior Managers, which helped turn the split between purchasers and providers into a hostile and adversarial environment.   

All of these changes were designed to make it easier for the private sector to take on more and more NHS work. The purchasers in the internal market weren’t constrained to buy only from the NHS, and particularly the GP fundholders were keen to spread their wings and buy a wider range of services for patients.

The reality however was that the private healthcare sector in the NHS didn’t really exist for them to buy from, which meant that the whole exercise was an expense failure. 

In every year from 1990 to 1997 the cost of running the internal market were higher than the value of the contracts that were let to the private sector.  Where there was innovation it was largely GPs setting up their own services to deal with illnesses which were more expensive to treat in NHS Hospitals. 

Private healthcare providers in the UK are tiny in comparison to the NHS, they only provide a limited range of elective operations, and don’t provide complex stuff like A&E.   The services they do provide they are almost entirely reliant on NHS for staff, plus a small number of ex-NHS people (many of whom left the NHS under a cloud).  This created a conflict of interest for NHS consultants who did private work – keeping NHS waiting lists long helped keep their private sector revenue high.

John Major spent more and more on the vast bureaucracy of fundholding, and invested a bit more in running the NHS.   While the use of private sector providers didn’t increase significantly under Major he did introduce the use of outsourcing for support services like cleaners. 

Despite some more money under Major when Labour returned to power in 1997 the NHS was in a dreadful state.  Huge waiting lists, ageing hospitals, shortages of Doctors and Nurses.   I know of at least one NHS CEO who was sacked when it was discovered they had draws in their office full of referrals hidden so that they didn’t show up on the official waiting lists.

I don’t think that the incoming Labour Government were actually honest with voters about the terrible state of the NHS in those days.  They were worried if they told the truth about how bad things were voters might start to think that it was better to get rid of it and start again with something else.  The concern that the Blair Government had about the pubic losing faith in the NHS was overstated, but was a significant factor in their decisions about the service.

As the Government put more and more money into the NHS they became very impatient for results, particularly after Alan Miburn become Secretary of State.  The Government was scared that middle class voters would balk at paying more money to save an NHS with long waits and start going private in large numbers, undermining support for the service. 

One of the easiest solutions to reducing waiting lists was to start and buy surplus capacity in the private sector.  Most private hospitals didn’t run their operating theatres more than a couple of days a week, and it was easy to start buying additional theatre space off them.

I will admit at this point that I was one of the people responsible for this.  I ran a PCT who had inherited a large waiting list for routine orthopaedic work.  I bought up so much operating theatre capacity at our local BUPA hospital that our Chairmans wife, who still  had private heath insurance, was appalled to discover it was faster to get an operation at her local private hospital by going through her NHS GP.  By the mid-2000s there were more NHS patients in BUPA hospitals than BUPA patients, and they sold all of their hospitals to Spire healthcare.

There is no doubt that this was very popular.  The patients who had been waiting a long time and who suddenly got their treatments in private hospitals were made up about it.  I liked it because it let me take control of the flow of patients into the private sector and allowed me to better manage the conflict of interest with NHS consultants who did private work. 

This piece meal approach to transferring waiting list work to the private sector by managers like me was such a success that DH decided to replicate this at a national level with the Independent Sector Treatment Centre Programme.

The ISTCs were supposed to encourage private healthcare companies, often from abroad, to come to the UK to areas with long waiting lists to provide additional capacity.  This was the first big attempt by the NHS to bring in big healthcare companies from the US and around the world to deliver patient services.

Wave 1 was 25 fixed sites, and 2 mobile units, and wave 2 was another 24.   It was soon apparent that there wasn’t anything like enough interest from the private sector globally to make this work, and the programme was opened up to NHS organisations to run and operate them.  By 2006 nearly all ISTCs were run by the NHS due to lack of private sector interest. 

A similar fate befell the NHS Commuter Centre programme.  Ministers (who by the nature of their jobs work in London) were concerned that people who commuted to work found it hard to access GP services.  6 Centres were commissioned, all from private sector providers.  All were closed due to lack of patients.   

More successfully the NHS opened 230 walk-in centres.  These were designed to improve GP Access.   In the decade from 2000-2010, the NHS opened more than 230 walk-in centres. These have been reduced by 50 since 2010.  The original plan was that these would be provided by private sector providers, and Virgin Health did win some of the contracts.   However the majority of these contracts too went to NHS Trusts or to companies formed by consortia of GPs, based on the old GP Out of Hours Consortia model.  This was based on a different model of providing primary care – APMS rather than standard GMS contracts.

The use of the private sector by the Blair Government is one of the most contentious areas, as it was seen by some as running contrary to the values of some Labour members.  Where the NHS bought up private sector capacity locally to reduce waiting lists it was mostly a success.  Where DH tried to encourage an expansion of private sector capacity nationally it was mostly a failure due to the lack of interest and capacity.  It is worth mentioning that while I was moving patients to BUPA I was also bringing a GP practice and a Dentists Surgery under state control, something Nye Bevan never managed.   

When the Conservatives can back into power in 2010 the NHS, despite over 2 decades of the internal market, still had very little private sector provision of direct patient care services.  The costs of running the internal market were still higher than the value of the private sector contracts that they were facilitating.  

The Landsley Act introduced a new dimension into privatisation – the outsourcing of existing NHS patient care services.  From this point on the NHS would have to offer the private sector the opportunity to take over the running of services, with the staff transferring by TUPE to the new organisation.  

I realise that this is a subtle distinction, but it is crucial – up to 2010 NHS privatisation had focussed on persuading the private sector to offer additional capacity to the NHS to expand patient services.  From 2010 privatisation was about letting the private sector run NHS capacity, with no pretence that they were bringing anything of their own to the deal.

In Community Services, where patient activity is less volatile there has been considerable interest in taking over services, in particular by Virgin Healthcare and Care UK.   I don’t really understand the rationale for this, as the private sector in these circumstances are bringing no additional capacity or expertise. They are just taking over the Unit General Management role at a slightly lower cost. 

I am also concerned about the mix of providers who are winning contracts.  There are actually some really good private healthcare companies out there, including some really good US companies like Humana and United who have a very distinctive approach to managing community services that I like.   Under the Tories these companies have actually left the UK healthcare market as they don’t like the way services are being contracted for.  Instead a relatively small number of private companies are taking over services with no obvious patient benefit.

It’s worth at this point to talk about the experiences of Circle Healthcare.  They were a Venture Capital backed chain of private hospitals, which won a contract to run Hichingbrooke Hospital, a small, struggling, NHS District General Hospital. 

DH had been working for a long time on a way to franchise the management of struggling NHS hospitals to more competent management teams.  As well as high performing NHS teams, DH were keen to give a Private Sector teams an opportunity to take part too.   Under Labour this policy didn’t really take off, and mostly it was used to pressurise good managers to take on badly damaged organisations

Under Landsley the policy was resurrected and Circle got the job of running Hitchingbroke DH.  in 2011. By 2012 Circle needed £4m advance on it’s contract.  By 2015 Circle announced that it would withdraw from the contact, although it will still continue to run the Nottinghamshire ISTC, one of the biggest contracts of it’s kind left in the private sector

The Circle experience illustrates the problems with the private sector running healthcare services.  Investors want predictable returns and reliable profits.  Services like Community Services or routine surgery can offer those returns.  Hospitals with A&E departments don’t do this. In a nutshell that is why private healthcare is so limited in the UK, and so expensive in the US.

Right now Circle, Virgin and Care UK are the main market makers for private healthcare, but even with the active support of policy makers they provide less than 6% of the Acute and Community Services budget.

The NHS Budget

Now we have an outline chronology of privatisation we can break the NHS budget down into some component parts so we can look at it more closely.

The 3 biggest bits of the NHS budget are:

Secondary Care. Sometimes described as Hospital and Community Healthcare Services, includes hospitals, mental health, community services

Primary Care. Sometime described as Family Health Services, including, GPs, pharmacists, opticians etc.  Over the last decade or so DH has tried to encourage new models of delivering GP services in addition to the standard independent contractor General Medical Services contract, through arrangements like PMS Pilots (Primary Medical Services), Alternative PMS, and PCTMS contracts.

Central Budgets. This is an odd mix of the 999 Ambulance Service budget, central management costs, and services which are very high cost and low volumes.  Central budgets, as you might have guessed, are nationalised too.

As a definitional point I am looking at direct service delivery costs, not indirect.  For example, if an NHS hospital is paid to treat a patient I am counting this as non-privatised spend, even if some of the money goes subsequently to a private sector cleaning contractor. 

While the share of NHS spend going into primary care has been falling the share of primary care budgets that the NHS provides itself  has increased.  This is mainly due to the introduction of directly provided primary care services. 

Since the 1940s lots of things have happened that have changed the balance of nationalisation and privatisation:

1. The share of the Secondary Care/HCHS budget which goes to the private sector has increased as services are outsourced to the private sector, for example services given to Virgin Health after the Lansley Act. When we talk about privatisation this is typically what we talk about
2. The share of the Primary Care/FHS budget which goes to traditional (privatised) GP practices has shrunk as non-GP providers have taken over a bigger role in providing primary care – for example NHS walk-in centres replacing general practice
3. The share of the NHS budget which goes to Primary Care/FHS has shrunk, and the share which goes to Secondary Care/HCHS has increased. Central budgets have increased the most. While this kind of financial shift over time is mostly invisible to the public (and journalists) it has a huge impact on the shape of healthcare spending.

Lets start with the HCHS budget which goes to the private sector.   Up to 1990 the numbers for this are pretty small, but not zero.  Some bits of the secondary care sector were never nationalised in 1947, however these were never more than a few percent of NHS spend.   Despite all of the efforts form 1990 to 1997 fundholding never really shifted that number up significantly, mostly small scale opportunistic spend on elective operations.

Putting a figure on private sector spend in the New Labour years is complicated because while money went out of the NHS to non-NHS providers lots of it ended up with Local Authorities – for example I transferred £100,000s from the NHS into my Local Authority to deal with the costs of continuing care.  Charities also became providers of NHS services too.

Over the first few years of New Labour private sector spend fell sharply as fundholding was wound up and the contracts that they had with the private sector were stopped.   The costs of the opportunistic use of private hospitals that I negotiated were very small – I was particularly aggressive in using the private sector, but this never amount to more than 0.5% of our total budget, and only lasted for a few years.

Working out how much Walk in Centres cost in total is difficult. Apparently the last NHS Organisation which actually measured this was Monitor, and when it become NHS Improvement the data vanished off its website.  It may be that NHSI actually knows the answer but finding someone in NHSI who is both knowledgable and helpful is beyond my talents.  

My guess is that at it’s peak the Walk-In Centre cost roughly £300m pa, funded by APMS Primary Care funding, with roughly 1/3 of this spend going back to NHS organisations such as Acute Trusts – in the North East for example the largest provider of walk-in centres is South Tyneside Acute Hospitals Trust.

The costs of ISTCs were rather helpfully looked at by the Commons Select Committee.  The total cost of payments to ISTCs from the programme’s inception up to 31 March 2009 was £1.2 billion (Hansard 2009b). Averaging this out over five years, and taking the total budget for the NHS in England of £98.4 billion in 2009/10 (HM Treasury 2008), this represents less than 0.5 per cent of overall annual expenditure.

All of which adds up to lots of big numbers, but not a lot in terms of total NHS funding.

The amount of privatisation since 2010 has accelerated.  Measuring how much is difficult task because of the poor quality of reporting in the general media.  Journalists often conflate the annual value of a contract with the total value of the contract over several years, which makes the sums involved larger.  

I think that roughly 6% of HCHS budget is now with the private sector, up from under 2% when Labour left power, most of which is outsourcing services, rather than buying additional capacity. 

If that helps us measure how much of the HCHS spend has moved to the private sector, and the relatively small amount of FHS spend which has shifted to the public sector we need to work out whether patterns of investment over time have changed this mix.

Working out these shifts turned out to be a big task, which is one of the reasons why this blog took so long.   I tried Department of Health who put in my touch with Legacy Records, who put me in touch with the Public Records Office who couldn’t help. The Nuffield Trust and the Institute of Fiscal Studies were equally stumped.  Eventually I found a data set from the Office of Health Economics which I could use.

Using the 3 headings above I was able to split out spend over time to create this table:

I have used public and private pretty crudely to mean the bits of the NHS spent in the public sector and private sector according to the definitions used in the late 1940s.  There has been a huge shift in the way the NHS spends it’s money from an NHS which was 1/3rd Primary Care under Attlee

If we start and quantify this the first thing we can see is that there has been a big switch over time from FHS spending, which goes to the private sector to HCHS and other spending, which stays in the NHS.   This is due to a big increase in the amount of funding that the NHS controls centrally for specialist services and for management costs, but also because of a massive decline in spending on dentistry and opticians.   In fact the shift in funding has been driven by a big fall in spend on opticians and dentists, and a big increase in the amount of money the centre hangs onto for itself.

The shifts in how the NHS spends it’s money over the last 70 years have had a much bigger impact than decisions about privatising and nationalising services.  There was a general swing towards public spending from Attlee through to Wilson, and a slow drift back to private from Thatcher onwards, but not enough to get anywhere close to the levels of private sector spend under Attlee.

There are 2 huge shifts driving this.  As NHS provider organisations have become more independent the centre has held back more and more funding that it controls centrally.   But there has also been a big shift in Primary Care funding away from Opticians and Dentists.  

Lets look at this on a graph shall we?

So should we be worried about NHS privatisation?

Yes

We shouldn’t worry about the private sector providing services to the NHS where they do so using their own resources, funded by their own capital investors, and where they own the consequences of their own decisions.  We also shouldn’t worry about loads of foreign, mainly US healthcare companies who are lining up to take over and privatise the NHS. This isn’t going to happen in the near future.

We should worry about the NHS awarding lots of contracts to healthcare providers like Virgin who provide services to the NHS using the NHS’s own staff and resources who are transferred to them for the life time of the contract.  The private sector in this kind of contract are bringing nothing to the NHS, and are picking off the lowest risk bits to make money off leaving the NHS with the highest risk, most difficult to manage services, which in turn increases the financial pressure in the NHS.

It is however worth remembering that there has never been a time when the NHS was entirely nationalised, and that this was the result of a decision by the Attlee Government right at the start.   Nationalisation peaked under Harold Wilson, which is no surprise, but Thatcher spent less in the private sector than Attlee did.

https://www.ohe.org/publications/compendium-health-statistics

https://www.ohe.org/publications/ohe-guide-uk-health-and-health-care-statistics

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/283778/WalkInCentreFinalReportFeb14.pdf

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/283778/WalkInCentreFinalReportFeb14.pdf

https://www.kingsfund.org.uk/sites/default/files/general-practice-in-england-overview-sarah-gregory-kings-fund-september-2009.pdf

https://www.kingsfund.org.uk/sites/default/files/Briefing-Independent-sector-treatment-centres-ISTC-Chris-Naylor-Sarah-Gregory-Kings-Fund-October-2009.pdf

https://www.theguardian.com/society/2017/dec/15/we-support-stephen-hawkings-legal-action-to-save-the-nhs

http://www.pulsetoday.co.uk/news/gp-topics/legal/nhs-england-wins-legal-case-impacting-new-care-model-contracts/20036711.article

https://www.crowdjustice.com/case/jr4nhs-round2/

https://www.crowdjustice.com/case/jr4nhs-round3/

https://www.nuffieldtrust.org.uk/chart/a-history-of-nhs-spending-in-the-uk

https://www.nuffieldtrust.org.uk/chart/spending-on-non-nhs-providers-of-healthcare

https://www.nuffieldtrust.org.uk/news-item/those-worrying-about-the-transatlantic-trade-deal-should-look-closer-to-home

https://www.ft.com/content/0067138c-2689-11e3-9dc0-00144feab7de

https://www.theguardian.com/society/2018/aug/05/how-virgin-became-one-of-the-uks-leading-healthcare-providershttps://www.theguardian.com/society/2018/aug/05/virgin-awarded-almost-2bn-of-nhs-contracts-in-the-past-five-years

No.

“Productivity isn’t everything, but, in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”  Paul Krugman

This is why I think that Paul Krugman is wrong, despite his Nobel prize.  People value human contact and personalisation more than economists do:

Productivity is rubbish. Inefficiency rules. Why Craft Gin is better than United Airlines.

Bloody immigrants eh? Coming over here, driving down wages, destroying terms and conditions of employment.  

Over the last few days British politicians have debated Brexit in the House of Commons, while their parties respective spin Doctors have filled the airwaves and provided content to partisan websites with endless drivel.

The arguments about Brexit are tangled up with a debate about immigration.  No-one wants to make the case against immigration on the straight forward grounds that they don’t like foreigners and so the discussion is always put in terms of:

• There are lots of people in this country who are disadvantaged by immigration because it makes it harder for them to find jobs, drives down wages, and damages working conditions

• The only way to reverse these trends are through ending free movement of people, tightly controlling immigration at lower skills levels, and therefore we must leave the single market/EU/EEA [tick you pick which one]

As you might have guessed by the title I am a bit sceptical about claims that immigration has been the cause of recent low levels of wage increases.   That doesn’t mean that no-one is negatively impacted by it, just that immigration has become a catch all explanation for all kinds of things which have nothing to do with it

My scepticism about the link between immigration and wages goes back to the 1992 General Election.  I was in Quarrington with some local Labour Councillors talking to prospective voters.  One of the electorate expressed the view that if Labour got in Quarrington would be flooded with immigrants, driving down wages and marrying all of the most attractive women.  The Local Councillor expressed severe scepticism explaining that from the Souks of Kandahar to the beaches of Jamaica there was absolutely no-one who wanted to come and live in Quarrington, and maybe a bit more competition for women might encourage some of the men to smarten up a bit, trying shaving once in a while.   The argument got more and more heated and sweary until the Local Councillor pointed out that the angry voter was themselves an immigrant having moved to Quarrington from Coxhoe.

Labour lost the 1992 General Election and Quarrington was saved from a mass influx of foreigners.  

I tell this story because both the voter and the Councillor believed themselves to be good solid, Labour chaps, but with completely divergent views on immigration.   The voter was expressing a long held belief that immigration drives down wages, destroys working conditions, and benefits the bosses not the workers.  This view has existed as long as there has been mass immigration into the UK.  Immigrant workers are shipped into the UK by wicked bosses to undercut good honest Brits. 

This hasn’t changed much.  This is Corbyn on the Marr show last year with some hard Brexit anti-immigrant rhetoric. (from 2 mins in)

https://www.youtube.com/watch?v=K7vVxHrJ6uI

I could share with you some right wing politicians talking rubbish about immigration, but why would I do the Daily Mail’s job for it?

I suspect that blaming immigrants for slow wage growth or poor terms and conditions is nonsense.  

To illustrate why it is nonsense let’s start by looking at different parts of the labour market.  If we start at the very top of the labour market we find high levels of labour mobility, high levels of immigration and very high wages.  The influx of foreign workers into Law Firms, City Banks/Financial Institutions and Premier League Football clubs hasn’t reduced wages at all, in fact the exact opposite has occurred. 

Football is a good example of this – over the last few decade the rules on clubs bringing in foreign players have got looser and looser, and more and more foreign players have come to the UK.  Sometimes Premier League clubs field teams without any British players at all, which I always find a bit sad although I am not sure why.   

This hasn’t led to a reduction in wages – far from it – wages for domestic and foreign players have rocketed.  Either supply and demand isn’t as big a factor in setting wages as simple Labour market models would suggest, or immigration is actively driving up wages.   At clubs like Sunderland it’s not hard to find examples of immigration led wage increases.  Sunderland has to offer higher wages to immigrant players to persuade them to move to the North East, in turn talented young UK players like Jordan Pickford demand parity. 

If immigrants really are driving down wages as a simplistic supply and demand labour market model would suggest then how on earth is Jack Rodwell earning £65,000 a week?

If we then look at the bottom end of the Labour Market there is no evidence at all of immigration affecting wages because market forces don’t determine wages – the Government does through the National Minimum Wage.   Changes in supply of workers at the lowest pay rates have no impact at all on people on low wages.   Different parts of the UK have different local labour markets – in the North East the difference between a free market clearing rate for unskilled labour and the NMW is very big.   If you take the number of jobs which pay less than NMW either legally or illegally the actual market rate is a long way below the rate the Government sets.    This affect of distorting local Labour Markets isn’t an accident- it is the very essence of what the NMW is meant to do. 

It is of course worth noting that there are in increasing number of people who are being moved into forced self employment, which removes them from the NMW rates, and about which we know very little.   If there are negative impacts from immigration it is in this group, the least studied, and the hardest to get data about, where we should be looking.

Industries with high levels of Immigrant Employment

For the rest of us  – those who aren’t on NMW and aren’t playing for Chelsea  – a great many of us aren’t impacted by supply and demand in the labour market either. 

The largest employer of immigrants in the UK is the NHS, with other public sector employers not far behind.  In the public sector wage rates are set nationally, and don’t change based on shifts in supply and demand.  Increasingly most large private sector organisations are the same.  Our business culture across public and private sector is bossy centralised HR Departments setting national pay scales and employment contracts which don’t vary in response to changes in supply and demand.    

It’s worth remembering that centralised standardised pay and conditions was a key demand of Trades Unions over the years, who aren’t the first people who should have been a bit more careful what they wished for.

This doesn’t mean that there are no industries where supply and demand impact on wage rates, just that it is a much narrower range of employment types than a crude model of supply and demand would indicate.   My peer group might be a misleading as it contains a high proportion of middle class college graduates, but hardly anyone I know has a job in which labour supply and demand have a big impact on their wages. 

As well as Healthcare there are 2 other sectors with very high levels of immigrant employment: Food and Drink/Hospitality and Food processing/Agriculture.

Roughly a quarter of all jobs in food and drink and hospitality are filled by immigrants, much higher in places like London.    Mainly these are jobs which are unattractive to UK workers, either because of poor working conditions, low wages, or because they are based in parts of the UK which are expensive to live in long term.    

If the supply of migrant Labour falls dramatically some of these employers would have to raise wages and improve conditions, and accept lower margins or higher prices. 

Many employers are already incredibly squeezed on their margins, and increased costs would cause many of them to go out of business.   The recent problems that Jamies Italian, Prezzo, Byron etc. have experienced show how tight margins now are in the middle and lower ends of the market.   The  expansion of restaurant and casual dining options in most towns and cities has been driven by migration – at the higher end of the market where margins are higher a reduction in the supply of labour might lead to higher wages, or it might simply lead to fewer food and drink outlets, fewer hotels. 

In many parts of the UK immigrants are highly likely to be the owners and founders of food and drink businesses not just their employees.  Restricting immigration won’t mean that those businesses will hire non-immigrant staff on higher wages.  Those businesses just wont’ exist. 

I have a confession to make that I know less about food processing and agriculture than I should, and the view I do have is coloured by my upbringing in the North East.  The majority of food picked in the UK is picked by immigrants, mainly from Eastern Europe, at any one time there are 10,000s working in the industry. 

I started to ponder the obvious question – who picked our fruit and veg before the Eastern Europeans did?

The answer is…. more Eastern Europeans.  The first seasonal immigrant labourers from Eastern Europe arrived in the UK in 1945 under the Seasonal Agricultural Workers Scheme (SAWS) set up by the Attlee Government.  This scheme was only scrapped in 2013 when Freedom of Movement made it irrelevant. Before WW2 Irish picking gangs dominated the industry.   Around the North East Irish picking gangs were known as Tatty Howkers. 

The industry was also dependent on large amounts of child labour.  October half term in the North East historically was tatty picking week, while fruit picking and hop picking in the South were heavily dependent on children working in their school holidays, often as part of family groups.  If this sounds like a long time ago it was  – children picking hops in Kent ended in the 1960s, tatty picking in the North East in the 1970s.  That’s how long we have been using migrant labour

Although there have been Eastern European fruit and veg pickers in the UK for the last 70 years there has clearly been an increase in numbers over the last decade or 2.  The biggest factor driving this increase is the squeezing of margins by Supermarkets.  We have come to expect a huge range of fruit and vegetables at very low prices, and this means a big increase in demand for labour and low wage rates.  There is an irony that many Brexiters claim that one of the benefits of Brexit is more locally grown fruit and veg rather than imports from around the EU.

There hasn’t been a time when seasonal agricultural labour paid enough to make it attractive to British adult workers, and there is no sign of that changing.  If we want more locally grown fruit and veg we need more immigrant labour

I don’t mind Pick Your Own Strawberries in the summer, but I don’t much fancy picking my own cabbages.

Stock and Flow

So if the traditional way of thinking about immigration and wages is wrong how should we think about it?

In order to illustrate how immigration has impacted on the Labour Market the best way to do it is to think about a basic Stock and Flow model.

Anyone who has worked with me will know that I love a stock and flow model. Anything from hospitals beds, child maintenance cases,  to gin bottles

Reducing the movement of people in and out of the Labour Market is a very crude way of looking at it, but it does allow us to look into the supply of Labour and how it has shifted over time

Lets start by looking at the number of young people entering the Labour Market.  I contacted DfE and ONS and neither of them had a proper data set to cover this, so I had to build my own, which was loads of fun.   I used the cohort of live births, adjusted the deaths in childhood, and then looked at what happened to them when they left school – how many left at 16, for example vs how many went on to HE.

The shape of the curve is caused by shifts in the birth rate but also by an increase in people staying in at school.  For example in the early 80s there is a big increase in youth unemployment which is followed by a big increase in the numbers staying on at schools and going into HE.

If we adjust for relative population sizes the decline in the number of school leavers is even starker.

The most notable thing about the data was the huge shift in the numbers leaving school without any qualifications up until the 1970s vs today.   Lets look at 2 similar size cohorts from the 1970s and today.  The school leavers from the 1970s will be starting to retire right now, and the school leavers in the 2nd chart are replacing them.

Lots of people are happy with highly skilled immigrants coming to the UK but would support controls on those without particular skills and qualifications.  What is clear from the data is that the people leaving the labour market through retirement are large numbers of experienced male workers who entered the workforce in the 1970s without qualifications, while the new entrants into the Labour Market are less experienced, graduates, and equally male and female.  While the UK has less demand for unskilled but experienced Labour than it once had the large numbers of unskilled workers coming to the UK makes perfect sense if you look at the people leaving and joining the Labour Market

Once we have the flow into the workforce lets have a look at the flow out of the workforce – the number of people leaving the labour market, through retirement or by death and disability.  Once again there isn’t a ready made data set for this from ONS or from DWP, so I took birthrate 65 years previously, adjusted for those who never entered the workforce (died in childhood), and the adjusted for people leaving early due to death or disability.  The proportion leaving the workforce due to death and disability has been similar over time, but with fewer deaths and more disability.

That gives us this graph:

The odd looking drop in the numbers retiring in the late 70s and early 80s is the WW1 and Spanish Flu cohort.  The big peak over the last few years are the baby boomers reaching retirement age.

This lets us look at the way that flows in and out of the Labour Market relate to each other:

Hopefully this picture is reasonable familiar.  In the 1950s and 1960s there is a big shortage of labour.  This is the era of the Windrush Generation, and when my In-Laws came to the UK from India to work for the NHS.   It is also an era when wages rose rapidly as shortages of Labour strengthened the hands of Trades Unions.

As the Baby Boomer generation enter the workforce labour shortages start and disappear, the position of Trades Unions weakens, and industrial relations gets a lot nastier.   The flow out overtakes the flow in again when the Baby Boomers retire, which co-incides with recent waves of immigration, however generally flow in exceeds flow out, which is why wage increases have been modest over recent years.

This however misses out one key group, which is very hard to track – the early retirement cohort.   Up until the 1980s early retirement wasn’t common, except in certain industries like the Fire Service, which had a limit on the number of years of service.   Starting in the 1980s as heavy industry closed employers started to offer early retirement packages to encourage expensive older workers to leave.  Since then this has become a regular phenomena  – every time there is an economic crisis employers public and private offer packages to go early.   I used this technique to slim down my team in the Civil Service during the austerity fad, before taking redundancy myself.

Pretty much every sector public and private and every skill level has been through these experiences.   As some who has just turned 50 and is frankly full of vigour and vitality I think this is awful.

OK.  That last bit might not be true.  I do like an afternoon nap.   

Sadly we only have a couple of decades of data on early retirement, which peaked at over 1.5m after the Credit Crunch:

Lets see what that looks like on a graph shall we?

We can pretty crudely add the early retirement cohort into the numbers leaving the labour market and then compare that to the flow in:

What this leaves us with is a lot of mostly unqualified, but very experienced workers leaving the Labour Force all at the same time as the Baby Boomers retire early.   The Baby Boomers on the whole entered the workforce when wage rises were higher, and tend to be more expensive and have better terms and conditions than the generations which came after them which entered the Labour Market when the flow in was higher than the flow out.

The Baby Boomers are also less well qualified than every generation which came after them.

Over the last few decades we have been encouraging these highly experienced, expensive, but less well qualified workers to leave the workforce in their 50s to be replaced by cheaper younger workers.  These cheaper, younger workers, however tend to be very different to the ones they are replacing, they are much more highly educated, and often have very different aspirations about the kind of work they want to do.   

The increase in migration over the last 20 years corresponds pretty neatly to the retirement and early retirement of this cohort, while the long term excess of flow in over flow out explains why wage increases have been suppressed.  It also explains they the mix of people coming into the UK has so many manual workers.

I realise that I have been a bit cheeky in that I started this blog by criticising simplistic models of how supply and demand set wage rates in the Labour Market, and then I have created a simplistic model all of my own.

Apart from the rather obvious thing that my simplistic model better reflects how actual employers view the Labour Market, more than anything I am sceptical about a free market view of the labour market.   I don’t think that widgets, or craft gin, and people behave in the same way.  People are sometimes perfectly rational, but often not, and their shift from rational to irrational in the way the make job choices

There is no traditional supply and demand based labour market model which would predict why I would decide to run a Distillery rather than take a more lucrative job as a management consultant.    There is no supply and demand based labour market model which explains Jack Rodwell.

Jack. Fucking. Rodwell.

The views expressed by Corbyn in the clip above, and by the angry voter in Quarrington are based on a very simple free market supply and demand view of Labour Markets.    This view has become so prevalent that even the left seem to have adopted it, if only the give a false appearance of intellectual sophistication.  

The demographic changes which drove the last round of immigration are coming to an end, and immigration is falling too.   Government is keen to claim credit for recent falls in immigration, but in my view the current era of high immigration was coming to an end anyway.  The falls in immigration, just like the falls in teenage pregnancy, are driven by bigger forces of demographics rather than any particular genius by Government Ministers.

This doesn’t mean that immigration will stop completely

Businesses need a regular flow of new workers if they are to expand, and the wider the choice they have the easier it is to grow.  As customers we want an economy with high levels of customer service, and labour intensive craft products.  We want barrista coffee, craft gin and artisanal cheese rather than Mellow Birds, Gordons and plastic Cheddar.  We also want a greener economy with less resource intensity.  

And we want our children to go to University, and compete for the best jobs.

This means that we are unlikely to ever go back to little or no immigration.  If we want to have free movement for the goods we buy on Ebay, and free movement for capital investments, and free movements for ourselves we will have to accept that some people will move to our country too.

Shutting off that flow completely will be about as easy as closing down the flow of goods on Ebay.

Postscript

Regular readers have probably noticed that the sections on rising wages in industries like food and drink retail are at odds with my usual views.   Normally I am sceptical that changes in government policy which increase wages have a big impact in sending businesses bankrupt, or increasing unemployment.

When we look back at reforms like Equal Pay legislation or the National Minimum Wage the increase in wages encouraged people into the Labour Market, and increased the pool of applicants for employers.  While businesses had to pay a bit more in the short term in the long run having a wider pool or flexible workers more than outweighed this.   Flexible labour markets which give employers the widest range of workers are a good thing for businesses, and reduce unemployment

Restrictions on immigration are different imho.  While they might increase wages they do so by making Labour markets less flexible and by reducing the pool of workers available.  Businesses have all of the costs, but none of the benefits.   For this reason increasing wages by restricting immigration is likely to be more destructive to businesses and employment than previous legislation like Equal Pay Acts

References

http://www.educationengland.org.uk/documents/dearing1997/dearing1997.html

https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/livebirths/articles/trendsinbirthsanddeathsoverthelastcentury/2015-07-15

https://www.gov.uk/government/statistics/participation-in-education-training-and-employment-2016

http://webarchive.nationalarchives.gov.uk/20160105160709/http://www.ons.gov.uk/ons/rel/pensions/pension-trends/chapter-4–the-labour-market-and-retirement–2013-edition/index.html

https://www.ifs.org.uk/uploads/BN234.pdf

https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/datasets/labourmarketstatistics

https://www.ifs.org.uk/elsa/report10/ch2.pdf

http://www.data-archive.ac.uk/

https://www.ifs.org.uk/uploads/publications/comms/r95.pdf

https://www.ftadviser.com/pensions/2018/03/21/early-retirement-to-disappear-by-2035/

I hope that people aren’t getting too bored with discussions of inequality, because this is another blog which touches on 2 familiar themes; how income is distributed; and how governments produce the statistics that we use to inform political and economic debates.

There is a common assumption that over last few decades the economic performance of different parts of the UK has diverged, with London and the Home Counties out performing the rest of the Country.   I wrote recently about income inequality and I wondered if the picture would look different if we thought about it geographically – rich areas and poor areas rather than rich people and poor people.

Lets start with Gross Domestic Product (GDP).  It is the most commonly used measure of how the economy is performing and allows international and historical comparisons, although it does have it’s critics.

David Cameron flirted with the idea of measuring happiness, but abandoned it when it turned out that no-one was happy, and lots of people blamed their unhappiness on his Government:

I like the way the Guardian’s photo editor picked a photo of Cameron with a sad face to illustrate the story.

Most people will have gathered from the Media that growth in GDP has been slowing since the Brexit vote.   This from the BBC recently is typical:

In fact while it is true that GDP growth is lower than it was before June 16 it has actually been slowing since David Cameron announced there was going to be a referendum:

This isn’t a surprise.

The referendum increased uncertainty for businesses, which in turn reduced investment, which impacts on the rate of growth.   This is however part of a longer term trend in GDP, as this graph from the ONS shows:

GDP growth has been slowing for decades, although it has become more consistent with smaller peaks, but fewer troughs.  The cycles of boom and bust may not have actually ended (as Gordon Brown foolishly claimed) but the busts have got much less frequent.

If we try and make sense of the squiggly graph we can break up the last 60+ years into a number of periods and see some patterns.

Eden-MacMillan-Hume 1955 – 1964

Nearly 10 years of Conservative rule, and GDP grew by an average of 3.1% per year. Wage rises for working class jobs were still low, but if you were middle class you hadn’t had it so good for a very long time.  Growth was patchy as this rather odd set of results from 1958 illustrate:

Patchy growth was the consequence of the Government trying to grow the economy without letting the trade deficit get too big.   At one point exchange controls were so tight that the Treasury had to approve the transfer of Jimmy Greaves from AC Milan to Spurs because the fee – a colossal £100,000  – might affect the delicate balance of trade.

Wilson – Heath – Wilson – Callaghan 1964 – 1979

A mix of Labour and Conservative administrations on either side of the oil price shock and the economic turmoil of the 1970s. Despite all of this GDP grew by an average of 2.96% a year.   GDP growth is very bumpy, with big swings from growth to contraction; 1965, 66, 68, 69, 70 and 71 all saw 3 quarters of growth and 1 quarter of contraction.   Both Labour and Tory followed variants on “stop/go” policies trying to balance growth, inflation and a trade deficit.

The Thatcher years 1979 – 1992

I am afraid that this is more bad news for the remaining Thatcher fans.   GDP grown was markedly lower in her years in office.  Despite the boom years under Lawson in the mid-80s GDP growth averaged 1.83%.  Given that Thatcher reaped the benefits of the oil boom this is a dreadful set of results.

Major and Blair 1992 – 2007

Major comes into office with continuity Thatcherite policies, but a sharp recession and Black Wednesday soon change his mind.  From Black Wednesday to the Credit Crunch GDP growth is back to 3% a year on average.  Unemployment falls during this period, and inflation is low and stable.  Blair even manages to reduce Government debt as well.  This is the era of NICE economics (Non-Inflationary Consistent Expansion).

Brown-Cameron-May 2007 onwards

GDP Growth is sharply negative in the immediate aftermath of the Credit Crunch, and recovers only slowly.   Average GDP growth is a 1.9% a year, only slightly better than the Thatcher era.  Inflation is low, but unemployment also low.   If we split out data from after the Referendum we growth is even lower – a meagre 1.5% –  like the early 80s but with worse pop music.

This, however only really tells us about information at a National level, it doesn’t tell us much about what is happening in different parts of the Country.

To work out what is happening regionally we have to use the ONS Gross Value Added (GVA) dataset.  This is a new way of looking at Regional economics and until a couple of years ago was treated as an experimental statistical method, although the data exists right back to 1999.  It takes a long time to produce and we won’t see the 2017 data until the end of 2018.

Experimental statistical methods – does it get more exciting than this?

We can start by looking at GDP growth by Nation:

England and Scotland are growing much faster than Scotland and Northern Ireland.

We can break down England further into Regions:

Since the records started all English regions have below average GVA growth except London. If we look at the post Credit Crunch years the variation is even larger:

This is total GVA not per capita, and it is also a chained value series so inflation effects have been adjusted out to show actual change.    The results for the North East and for Yorkshire and Humber are shocking.

There are 2 other things we can do with the data.  We can look at GVA per capita:

This shows that disparities in wages between London and the rest of the country reflect that the GVA per capita is  much higher in London than the rest of the country.  In fact the gap between London and everywhere else is great than the gap between the areas of the UK excluding London with the highest and lowest levels of GVA.

The second interesting thing that we can do is  look at changes within Regions by zooming in on data at Local Authority level.  At this point you should notice that the data changes, and the differences between London and the rest the UK doesn’t look as stark.   That’s because we are no longer dealing with a chained value series, so inflation effects are included, and because we are looking at GVA per capita, so population changes have an effect.  The growth in population in London balances out some of the total increase in GVA.   This is the Income based approach to GVA.

This is the data for Yorkshire and Humberside which shows how GVA per capita growth fell after the Credit Crunch.  The period 1998 to 2007 showed healthy levels of growth well above inflation right across the region.   Post Credit Crunch growth levels are well below inflation which means a real terms fall in GVA, and a real terms fall in average income.

The numbers for areas like North Lincolnshire are shocking – a fall in GVA before inflation adjustments.  I think of York as a pretty place full of tourists, but in terms of GVA it has more in common with the stagnant Northern Cities than the more dynamic bits of the North.   Or maybe an economy based on tea shops doesn’t create as much wealth as we thought?

These are the same numbers for the North East:

It’s not hard to see a pattern of big falls in growth in places like Newcastle, Redcar, Barnsley, Sheffield, and Doncaster.

This is the data for London:

Not only are the affluent parts of London a lot richer to start with, but the falls in GVA growth overall aren’t as stark as their Northern Cousins.  Overall however London’s average is held down by the huge disparities between the more prosperous and fast growing Boroughs and the worst.   Which leaves the obvious question:

What the fuck is happening in Croydon?

Now we have the Local Authority level GVA data some interesting correlations start and emerge.

There is a clear correlation between GVA growth at Local Authority level and the EU Referendum results.  I can’t claim credit for this analysis as it came from the Financial Times.  This is their rather nifty graph:

I am sure that there are cultural aspects which underpin the Leave vote too, but the link between Regional GVA and the EU referendum is pretty stark.

There is however another link that stood out to me – the link with life expectancy.  While life expectancy across the UK continues to improve the rate of improvement has slowed noticeably, and in some parts of the country it is starting to reverse.

I blogged about these falls in life expectancy and the relationship with austerity economics a while back:

Does Austerity really kill? If so how many? How can it if we are all living longer?

It isn’t an exact correlation but there are clear signs that the areas which show the biggest growth in GVA are among the areas where life expectancy is increasing the fastest, and the areas where GVA growth is lowest are the ones with the slowest growth in life expectancy or even falls.

These are the tables for the same regions showing changes in life expectancy.

Life expectancy across the region is still increasing,  but the rate of increase is slowing, and in some areas is starting to decline.

The North East is even worse:

Life expectancy at birth is falling, but is only increasing for women at age 65.

Where there are declines it is the familiar list of names: Middlesbrough, Newcastle, Redcar, Barnsley, Doncaster.

The data for London is predictably a lot better, with increases in all catagories

If you squint carefully you will see that the awful GVA data for Croydon is reflected in a declining male life expectancy at birth.

We need to be a bit careful in describing a rigid relationship between economic change and life expectancy; while Scotland’s economy is growing faster than Wales and Northern Ireland it’s life expectancy is the lowest of all the Nations, and the gap is getting bigger:

Too many deep fried Mars Bars.

It is also clear that it takes a long time for economic changes to feed through into changes in life expectancy.  Sadly this probably means that even if things start to improve over the next few years it will take a long time for this to reverse the trend in health status.

There are some pretty easy conclusions that we can draw from all of this.

The period up to the credit crunch saw growth in GVA and life expectancy across the UK.  London did better than parts of the North, but not at the expense of the North.  Since the credit crunch not only has growth been lower, but the balance of growth has been much more uneven, and the gap between London and the rest of the UK has been much more severe.

Some of these changes in GVA have clear links to the austerity policies of the Cameron and May Governments.   I haven’t gone through the Industry by Industry data here but the cuts in Government spending were a major cause of changes in GVA in the North.  It is harder to map the impact of QE and low interest rates through the data, but it does look rather like lots of the extra money that the Bank of England printed didn’t get much further than the M25.

It is also clear that the prolonged slump in GVA and GDP growth in the North is having an impact on life expectancy.   These are small changes, and they are forecasts, but they are driven by an increase in mortality rates over the last few years.

We have been used to being told that we are all living longer.   For some of us this is no longer true.

What all of this reminds me of is this paper by on mortality and morbidity in the USA by Deayton and Case:

http://wws.princeton.edu/faculty-research/research/item/rising-morbidity-and-mortality-midlife-among-white-non-hispanic

I’m not too bothered about inequalities in income.  I am bothered more by poverty.  I would rather live in a country where no-one is poor but someone people have gold hats, than a country where no-one has a gold hat but there is lots of poverty.

But these regional datasets really bother me.  It looks like parts of the North of England are starting to follow the pattern of economic decline, falling life expectancy and political volatility which we have seen in big chunks of the States.  Trump was driven to victory by white voters in areas with declining economic fortunes and sharply declining life expectancies.   

We are creating the exact same explosive mix in the UK too. 

And just like America the people living in these areas are largely absent from the national debates about politics and economics, and are cultural invisible to lots of people.

“Two nations between whom there is no intercourse and no sympathy; who are as ignorant of each other’s habits, thoughts, and feelings, as if they were ….. inhabitants of different planets.”

https://www.ons.gov.uk/economy/grossvalueaddedgva/bulletins/regionalgrossvalueaddedincomeapproach/december2016

https://www.ons.gov.uk/economy/grossvalueaddedgva/datasets/regionalgvaibylocalauthorityintheuk

https://www.ft.com/content/37944828-e586-11e7-8b99-0191e45377ec

https://www.theguardian.com/inequality/2017/dec/23/health-gap-between-uk-rich-and-poor?CMP=twt_gu&__twitter_impression=true

https://www.theguardian.com/politics/2010/nov/14/david-cameron-wellbeing-inquiry

https://www.ft.com/content/cf51e840-7147-11e7-93ff-99f383b09ff9

Thanks to the Health and GVA team at ONS for pointing me in the right direction for some of the data.

I have written previously about why the current system for measuring unemployment might not giving us an accurate picture:

Unemployments rising in the Chigley End of Town

People will have read in the media that UK unemployment is at it’s lowest since the 1970s.    This from the BBC is typical:

I thought that it might help to share the actual definition of unemployment being used to measure this huge fall:

One hour.

https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/methodologies/aguidetolabourmarketstatistics#employment

Another micro-blog, this time on PFI, and a not very hot take on Carillion and Capita.

I was going to avoid talking about the collapse of Carillion.  I get a bit frustrated talking about PFI because lots of people strongly dislike it without knowing much about it, which makes for a less than fun debate.   The same is true of Government outsourcing, which isn’t the same as PFI, but tends to get bundled together with it because lots of PFI schemes involve the outsourcing of some or all facilities management services as part of the PFI deal.

I’m not as hostile towards PFI as some people, partly because I worked on a couple of Hospital PFI schemes.   It’s not a bad capital sourcing route when the Treasury cost of capital is very high, but when the interest rates the Government can borrow at are as low as they are right now there is no point in PFI at all.

I do however have a big problem with off balance sheet accounting, which is a technique associated (but not the same as) PFI where Governments hide the amount of debt they have run up.  The reason why PFI and other off balance sheet wheezes continue to be popular with Labour and Tories is because Politicians don’t want to be honest about the amount of debt they want to incur.

I don’t have a problem with outsourcing either – I just believe that there are some bits of the public sector like basic administrative tasks which work well on an outsourced model, and lots of bits of the public sector which should never be outsourced; including all of Criminal Justice.  I also think that there are lots of parts of the public sector where the costs of administering outsourcing are so high they outweigh any advantages outsourcing might have – the NHS for example.

One of the main factors with PFI and any kind of outsourcing is the extent to which the Government or the NHS transfers risk to the Private Sector.   There a lots of good reasons why the State would outsource work or sign a PFI deal – they need short term but not long term capacity, or they want specialist skills in building or managing a project.  Whatever the reason for the PFI project or the outsourcing decision the contractual arrangements should always show a transference of risk.  The private sector takes on work because it wants profit, and any profit/reward should reflect the degree of risk the contractor takes on.

While I was sad that Carillion collapsed this is essentially the consequence of PFI working properly.  It’s not meant to be risk free.  The problems with Carillion aren’t a sign that PFI has failed. The show that it is working.  Carillion either got greedy, or it failed to appreciate the degree of risk it was taking on over the 400+ Public Sector contracts they took on.

This is a graph showing Carillion’s income from PFI contracts when they went bankrupt:

This is a graph which shows total PFI payments past and present across the whole industry:

The 2 graphs aren’t exactly the same shape, but the similarity is striking.  Carillion was pretty typical slice of the PFI market.

All this really tells us is the size of the reward. The question is – did Carillion simply have more risk than other companies?  Was it just badly run?  Or is there more systemic risk in the PFI market than we thought?

I changed my mind about writing about Carillion because I saw the headlines on Capita.   They issued another profit warning this week, disclosing a £513.1m pre-tax loss due to £850.7m of “specific non-underlying items” which dragged on its performance.  This compares with an £89.8m loss in 2016.    Capita have over 1000 public sector contracts and their collapse would be much messier.

I visited some of Capita’s outsourcing sites a few years ago when I was assessing potential outsourcing partners for the DWP Quango I was working for.   They have lots of high profile, mission critical, outsourcing work, including the Congestion Charge, Teachers Pensions, TV Licensing and lots of NHS back office work.  Some of their work in criminal justice is scary stuff – offender tagging, and 999 systems.    Notably they haven’t been awarded any new Government contracts this year, which suggests that there is a growing reluctance to give them work.   Knowing a bit about the rigid thinking of public sector procurement teams there must be something very scary in the financials to put them off.

The shape of the 2 graphs above and the scary state of Capita suggests that Carillion’s problems might actually be systemic across the industry, rather than just the result of poor risk management.

When Carilion went under there was an obvious solution to their problems.  HMG could have borrowed cheaply, bought out the PFI contracts from Carillion.  This would have given the remaining private sector division of Carlillion enough capital to keep it afloat, while cutting the long costs (because the PFI contracts would effectively had been refinanced more cheaply).  A clever person would have taken over all of Carillions PFI division and used it as a state owned infrastructure company which could have taken over other expensive or problematical PFI or outsourcing contracts from other contractors.

But that would have been ideologically impossible to either Political Party.

I was a Miner, I was a Banker/I was a Quantitative Analyst/Between the Wars/I played at Glastonbury/In time of austerity

A bit of a follow up from last weeks look at the ways property wealth, property tax and pension wealth interact and how monetary policy can change how wealth is re-distributed.  

While I was writing it Andy Haldane (did I mention he was my favourite Central Banker?) invited Billy Bragg to give a lecture on Monetary Policy at Threadneedle Street. This is the video of it:  

https://www.bankofengland.co.uk/events/2018/april/one-bank-flagship-seminar-billy-bragg

Just to manage your expectations he doesn’t do “Levis Stubbs Tears”.    Billy Bragg at the Bank of England may sound odd, but it was meant to expose Central Bankers to a broader range of views outside of their own bubble.  There was a predictably mixed response, with people liking or disliking his speech based mostly on where they were politically before the speech rather than the actual content of it.

Billy’s big point, I think, is that the lack of accountability by Institutions is driving support for authoritarianism.  This is spot on. This lack of accountability is a huge problem for public institutions and faith in democratic politics – politicians are mired in scandal and yet no-one resigns.  Since Gordon Brown made the Bank of England independent in 1997 there has been an assumption that interest rates and monetary policy are politically neutral, but when decisions are taken that re-distribute wealth that can’t be apolitical.   It’s worth reflecting on this next time someone suggests taking the NHS out of political control in the same way as the BofE.

He also talks about the way that the money spent on things like QE could have been spent more usefully on building schools or hospitals.  I think that Billy is actually describing 2 similar but subtly different approaches.

The first is that the Government could borrow money very cheaply and spend it doing things that would help improve society and the economy.  This is spot on.  Over the last few years we could have borrowed cheaply, fixed every pot hole, every leaky classroom roof, bought a brand new set of state of the art NHS diagnostic kit.  Not only would this have saved money in the long run, but it would have helped grow the economy too.

We could also have bought out any PFI deals signed at high interest rates before the Credit Crunch with a long time left to run on them.   A couple of the NHS Trusts I worked for have done just that, using low interest rates and some of the financial flexibilities available to Foundation Trusts to buy out historic PFI:

https://www.ft.com/content/490d42ae-2f0c-11e0-88ec-00144feabdc0

https://www.theguardian.com/healthcare-network/2011/feb/03/pfi-nhs-trust-paid-off-tees-esk-wear

https://www.ft.com/content/cc4f10b2-4951-11e4-8d68-00144feab7de

https://www.independent.co.uk/life-style/health-and-families/health-news/northumbria-nhs-trust-saves-67m-by-freeing-itself-from-pfi-deal-9517844.html

I like the way that the FT describes both of them as the first.   Just goes to show that even the best newspapers struggle to follow the boring detail of public borrowing and PFI deals. 

The second approach is the possibility of using QE style asset purchases to do something more ambitious than buy Bank Bonds.   We could, for example, issue Local Government Bonds, which the Bank of England could buy, and use this money to build Council Houses.  This idea was promoted by John McDonnell under the heading of Peoples QE.

I’m a bit more sceptical of Peoples QE.  The most obvious reason is that we could just use conventional public sector borrowing to achieve this, particularly when interest rates are low.  It’s a solution to a problem which doesn’t need another solution.   The reluctance to use cheap borrowing is because politicians don’t want to be honest about how much they are borrowing, and that doesn’t help improve accountability.

Both plans – traditional Government borrowing and Peoples QE – share some similar problems.  When the Government spends capital it almost always needs a flow of revenue to go with it.  A new Hospital needs on-going spend on Doctors and Nurses, Schools need Teachers, Roads have pot holes.   The only areas of Government capital spend which don’t have this problem are things like Council House building where the capital spend brings in rent.    

Having run public services myself there are very few uses for capital which doesn’t come with revenue consequences if only to fund the interest payments.

There is also an even nerdier problem with using Government spending or Peoples QE rather than traditional QE.   The traditional QE model benefits from the magnifying effect of fractional reserve banking.    The size of the lending that Banks can release into the economy is much greater than the size of the asset purchase. 

But peoples QE has a more profound problem.  While the Global economy is dependent on QE no-one knows when or whether it has negative long term consequences.   It may be that it distorts capital markets, increases volatility, or decreases long term growth.  It might even be that Andy Haldane is wrong and it increases inequality.

With conventional QE it is easy to reverse the process.   The Bank can sell off the bonds it purchased and reduce the amount of QE.   With unconventional or Peoples QE it is much harder to reverse the process if you need to reduce the amount of QE in circulation.  If you have used the funds to build Council Houses the only way to reduce the QE is to start selling off the Council Houses.   If you have used the funds to build Hospitals then they will have to be sold too.

It’s easy to see how this produces an almost impossible dilemma for a future Government.   If QE is causing inflation, or making the poor into paupers but the only cure was selling off Council Houses or Hospitals how would a Government act?  How would a Corbyn led Government survive this kind of dilemma?

This is a more conventional clip of Billy:

https://www.youtube.com/watch?v=wWjO9BTJhPc\\

More to come tomorrow….

https://www.theguardian.com/music/2018/apr/08/billy-bragg-to-give-speech-on-how-to-build-a-better-society-at-boe

https://www.opendemocracy.net/neweconomics/alternative-qe-billy-bragg-right/

http://www.cityam.com/284358/bragging-rights-city-heavyweights-flummoxed-popstars-bank