Why can't government budget like companies?
Posted by Christie Malry on January 1, 2012 at 11:24 am
So, a new year begins. And for companies operating on a calendar year-end basis, that means a new budget period begins too.
In setting a new budget, companies will either build on what they prepared for the previous year, or they'll start from scratch in what is called 'zero-based' budgeting. Either way, typically companies will seek to set realistic targets for sales and costs and add challenging targets to incentivise and stretch employees. In one company I used to audit, the finance director would add in random gobs of profit to his business units at the final stage of budget preparation. Although he didn't know exactly how this profit would be earned, it provided a handy incentive to the business to perform ahead of the previous year.
Through the eyes of business, government budget setting must look like complete lunacy. While a business aims to earn more and spend less, government views it as a badge of honour to spend more and more every year. Even in a time of supposed austerity, government spending is still increasing year on year.
So it would be nice for government to make itself a New Year's Resolution. That, over and above the announced austerity 'cuts' (if indeed they ever happen), it will cut government department spending in real terms year on year. How those cuts are implemented is up to the department concerned. But, like any good business, it should be expected to find efficiency savings and deliver them to taxpayers.
This might be viewed as right-wing and ideological. It's not; it's driven by the observation that, without downward pressure on budgets, there is no incentive to seek efficiencies. Without that incentive, it's virtually impossible to deliver them, especially in the face of opposition from unionised employees. Typically budget cuts are portrayed as hurting those who receive services, without considering the pain already inflicted on those who pay for them. As we all receive state services and most of us pay, we cannot go on like this. So, how about it, George?
A business's purpose is to profit the business owner, or the shareholders. A government runs a country, and a country is not a business. A country's purpose is not to provide goods and services in order for the owner to make a profit. A country doesn't have shareholders: it has citizens, residents, families, children, visitors, tourists - people.
A government which is run like a business would be supposed to profit its owner or its shareholders. Who owns the government? In some cases, like Greece or Italy, there's a clear answer - Goldman Sachs. But normally, in a functioning democracy, the answer should be: We all do.
You could declare that metaphorically speaking a citizen is a shareholder in UK.co, but the flaws in this metaphor are clear - not least that a citizen doesn't expect to get a direct income out of their "shares" and does not, in fact, own any shares except by another complicated metaphorical translation. Further, people who are not citizens live in the UK, and in most cases to the benefit of both us and them, but not necessarily in terms of strict financial profit.
Inefficiency in government and statutory services is something that isn't actually as common as the Tory press would like to make you think. The NHS is internationally renowned as one of the most cost-effective, efficient, and universally-available national health services. If anything it could benefit from a bit more spending - if we're in the top 10-15 of countries after so many years in which Tory government starved the NHS of funding, and Labour unfortunately got stuck into the idea that PPIs were the way to go, imagine what we could do with the level of funding available before 1979? The NHS doesn't exist to make a profit on UK balance sheets: it exists because its profit is the health of the British population, which is not valued by pounds-and-pence.
Allow me to be somewhat underwhelmed by the claim at the start of your fourth paragraph, which you write on the very day that we learn that some council house tenants earn over £100,000 per year and others are permitted to sublet to others for profit. This is the sort of situation you get from a complacent approach to financial management.
While I might accept your first paragraph, it doesn't explain why they shouldn't be more similar, particularly when it comes to something as fundamental as financial management. After all, mutual organisations share many of the same concepts as limited companies. So your argument is fallacious.
"which you write on the very day that we learn that some council house tenants earn over £100,000 per year and others are permitted to sublet to others for profit."
Thanks for asking - I wrote a blog post about the really expensive issues around tenants & renting in response to that same news item. Feel free to respond at more length there.
"This is the sort of situation you get from a complacent approach to financial management. "
See above, again. Your presumption that it will be cheaper to start treating council houses as a means-tested benefit rather than invest money in regulating private landlords is fatally flawed.
"While I might accept your first paragraph, it doesn't explain why they shouldn't be more similar, particularly when it comes to something as fundamental as financial management. After all, mutual organisations share many of the same concepts as limited companies. So your argument is fallacious. "
Both mutual organisations and limited companies have a key difference from nations, and it's not just size.
Inclusion. A nation needs to consider every single resident - not just the citizens - and regardless of whether or not they can "pay their way". A teenage kid in care may never "pay her way" in the strict pounds-and-sense terms. But she will cost the country more and more and more if it's decided that because she never will be worth much, it's not worth providing her with the same goods and services as the child of a wealthy couple who will get the best education and go to the best schools and get a good job and earn plenty of money. Every child needs a home, needs enough to eat, needs decent sanitation, needs a good education - and there's no use in declaring that the only children who will get these things are the ones whose parents can afford to pay for them, or the ones who are deemed to be a good investment.
From the beginning to the end, it's always simpler and cheaper to assume that what everyone needs, they should get: that taxes paid shouldn't relate to benefits received but to money earned. Business-orientated people who want to think of their country as a company lack vision and imagination: they can't see outside their own box, or think imaginatively about how such a country would really work.
You've made the same logical howler as you did in your first comment. It's not that I, or others, want to think of our country as a company. Instead, it's asking whether any of the experience gained from running companies might be useful in running the country. Sticking your head in the sand and bleating "But the country isn't a company" doesn't answer that question.
Stuff like "It's always simpler and cheaper to assume that what everyone needs they should get" is naive student politics at its very worst. And it's also ex ante bullshit. (You're welcome)
"Instead, it's asking whether any of the experience gained from running companies might be useful in running the country"
From what you outline in your blog post, and your inability to engage with criticism of your ideas, no, not really.
"Stuff like "It's always simpler and cheaper to assume that what everyone needs they should get" is naive student politics at its very worst."
Bless. Now that's the kind of ignorant comment I expect from someone who has limited their thinking to profit / business ideas. Universal benefits are overall cheaper and easier to provide than means-tested benefits. Anyone who has studied the benefits system knows this.
"From what you outline in your blog post, and your inability to engage with criticism of your ideas, no, not really."
There is no criticism in your response, merely a tired rehashing of long-refuted student trot drivel.
"Bless. Now that's the kind of ignorant comment I expect from someone who has limited their thinking to profit / business ideas. Universal benefits are overall cheaper and easier to provide than means-tested benefits. Anyone who has studied the benefits system knows this."
That claim is nonsense. It presumes - wrongly - that users are transparent and honest about their needs. This is a hopelessly naive and optimistic view of people who in reality are opaque and dishonest about what they need. I'll leave it to you to explain how, say, a universal housing benefit system might operate in practice. It already costs us over £20 billion a year on a means-tested basis. How much would it cost if made available universally? How would that work?
If you're going to have the bad grace to waltz onto my blog and throw about half-baked ideas and ill-spirited insults, I think you at least should be prepared to put some meat behind the pathetically sketchy ideas you have outlined.
i'm afraid i don't recognise that company budgeting process at all.
surely what happens is that the knowledgable finance director (let's call him 'thenoyboodle') builds up a budget based on his detailed understanding of the business and trading conditions (taking input from the experienced client relationship team, and department managers as appropriate) and creates an accurate baseline, upon which we add challenging, yet achievable, stretch targets... thus producing a robust budget which all stakeholders can buy into.
then the chairman and non-execs take one look at the EBIT figure, add 15%, round it up to the next million, and tell thenoyboodle to add in sales that won't happen and savings that can't be made. this he does, and we all spend the next 12 months explaining why we're not making budget.
then, when all the beans are counted at the end of the year, thenoyboodle takes out his original budget.. compares it to what actually happened.. and allows himself a little wry smile.