I wrote a while back about the Whole of Government Accounts project. As you'll recall, government received a number of qualifications in the auditor's report on the accounts because of the way it had failed to account for some things properly. And one of those qualifications was for failing to consolidate the nationalised banks into government's results.

OK, let's clear up some of the jargon in case you're struggling. "Consolidation" is the process of showing the results and financial position of a group of companies as if they were a single entity. This means you remove all balances and transactions between group companies and only show the true external position. In the case of RBS, that means removing the investment in government's books and bringing in instead all the revenues and costs and assets and liabilities.

Now, government really did not want to do this. They argued that this would lead to a strange set of accounts, given how big the figures are compared to the rest of government spending. Too bad, says the accounting standard in question, IAS 27, which explicitly forbids subsidiaries from being excluded from consolidation just because they're very different to the rest of the group ¹.

Indeed, the only exclusion that might apply to WGA is the concession that subsidiaries that are being held for disposal within 12 months need not be consolidated. But, if they're still there after 12 months, you have to consolidate them from the date of acquisition and restate your accounts accordingly.

This was all true even before the Hester bonus kerfuffle. But what the interference over his pay demonstrates is that government won't be a passive investor while the banks get back on their feet. Instead  it will be getting its hands very dirty by meddling in all sorts of operational decision-making. The remuneration committee had already approved his bonus, in accordance with the terms of the contract he signed with the previous Labour government. That contract is shredded today, thanks to Labour's naked and hypocritical opportunism, and the Tories' shameful lack of backbone.

Yet it makes it all the more difficult today to argue that RBS is a soon-to-be-disposed arm's length business. It's quite clearly just another political operation. So government will face increasing pressure to consolidate RBS when it issues the next set of WGA later this year.

Filed under: Accounting, Politics with tags banks, bonuses, conservatives, labour, royal bank of scotland, stephen hester
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I just caught a brief piece on the Today Programme about changes that are proposed to disability benefits. During this piece, it was claimed that the government was going to cut disability benefits by 20%. Only, when challenged, it was conceded that spending would broadly remain at the same level, but that - in time - that level would be some 20% lower than recipients might have expected.

If you're spending £100 on something this year and £80 next year, that's a 20% cut. If you're spending £100 on something this year and £100 next year then that's a 0% cut. To describe it as a 20% cut merely because you thought you were going to spend £125 next year is totally misleading.

Now, I recognise the need for disability benefits and the great improvement they bring to people's lives. But, if you're trying to convince the Chancellor why he should prioritise spending money there instead of, say, education or the National Health Service, please can campaigners base their appeal on facts rather than blatant lies?  Is that really too much to ask? There's an argument to be made for spending more on disability benefits. So make it. To exaggerate or lie about your case merely suggests to taxpayers that your arguments for prioritising spending on disability benefits, when it comes down to it, are weak.

Filed under: Politics with tags bbc, disability living allowance, lies, statistics, today programme
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Pre-distribution. The single (non) word that Eoin thinks will win Labour the 2015 election. So what is this big idea?

Essentially, the jist of Pre-Distribution is that you fix the way capitalism works before profits & incomes are made, and that way you have less redistributing to do at the other end. Take rail fares for example. During the New Labour years, the prices of rail fares were permitted to rise 5% over the rate of inflation. That often meant rail fare increases of 10%+. Under Ed Miliband's leadership, the maximum rail companies would be permitted to raise fares above inflation would be 1%. This would dramtically reduce price increases and thereby make the burden of transport costs easier for commuters. By making customers fork out less you enable them to keep money in their pockets and thereby help them cope with the cost of living crisis. Whereas subsidising transport costs, capping rail increases does not.

Eoin has managed to spectacularly miss the point here. The cost of rail depends really on two things: the quantity of services that need to be provided and the amount of investment that's needed to preserve and enhance the rail network. And this cost can be paid for in two ways: by recovering it from passengers through ticket prices or from general taxation.

If you cap rail fare increases, ceteris paribus, the amount of money to fund the railways will decrease. And this means that either the rail network has to run fewer trains or it cannot fund necessary improvements and repairs to the rail network. Or, most likely, both. Eoin's assertion that "capping rail increases does not [cost]", it most definitely does cost. Either more money is needed from general taxation or the quality of service provision must fall.

The same type of philosophy can be applied to reductions in Corporation Tax. Ed Miliband has said that companies qualifying for low tax will have to sign up to proper apprenticeship programmes or face punitive taxation. In addition crèche providers could be prevented from charging parents registration & reservation fees of hundreds of pounds when capacity at their crèches is not utilised.Can you see a pattern developing? You regulate companies to get it right at the point of pricing and delivery rather than correct big businesses failings by subsidising low wages etc. Whereas Tax Credits to subsidise low wages cost, a Living Wage does not.

The first bit of this is total interventionist meddling bollocks. Government has no authority to fuss about in private businesses like this. And they're totally incompetent at the bits of business they run themselves. They'd be mad to seek to interfere in the business affairs of others, and could certainly not hope to reduce overall costs by doing so.

The idea that a living wage is a free lunch is very dangerous. The living wage would destroy jobs. Maybe not today, maybe not tomorrow, but some day - and for as long as the living wage remains in force - it will destroy jobs. Some of them would end up being mechanised. Some would get exported to China or India. Some would end up being done by other people already working. But while we cry over redundancies, we never shed any tears for those jobs that were never created in the first place. And a living wage would lead to vast numbers of businesses seeking to place jobs elsewhere, in countries where the living wage legislation doesn't apply.

So this is the big idea that will win Miliband the 2015 election? I really don't  think so...

Filed under: Politics, Regulation with tags ed miliband, eoin clarke, eoinomics, idiots, labour, living wage, minimum wage, railways
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Here's Eoin eulogising about his beloved Labour party:

Our leaders are down to earn and are accessible to all.

It's just so Freudian!

Filed under: Other blogs, Politics with tags eoin clarke, fucknut, labour, quote of the day
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I propose that all income tax returns of anyone living in the UK should be in the public domain.  These should also include a nil return for those not paying any income tax at all.

The benefit would be to highlight those who are evading tax or pinpoint those who are earning large sums and paying little.  The present levels of tax evasion and tax avoidance are large and they penalise ordinary people who pay their money usually through PAYE and don’t cheat the system.

Says  Lord Dubs.

Well, I've said it before and I'll say it again. If Lord Dubs or any other person genuinely thinks it's a good idea, why not volunteer the information yourself? Show us how you've got nothing to hide and how there's really nothing to fear from having this information in the public domain. Demonstrate how we're all wrong when we say it's an appalling invasion of privacy and a bonanza for identity thieves.

Otherwise, you know, you can just fuck right off, matey.

Filed under: Politics, Taxation with tags idiots, lord dubs, tax returns
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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?

Filed under: Financial management, Politics with tags budgeting, deficit, george osborne, new year's resolutions
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Premium bonds are an investment opportunity that the UK government has made available to its citizens. Up to a maximum of £30,000 per person, you can buy bonds that qualify you for entry into a monthly prize draw, with a top prize of £1 million. Prizes are tax free and bonds remain in play until the capital amount is withdrawn.

Premium bonds are paid for by the opportunity cost of holding them. While the overall rate of return is reasonable, if modest, especially when compared against other post-tax rates of return, most bondholders go for years without a win. Due to inflation, the capital value of their investment is eroded. However, they're quite fun and provide a safe way to have a bit of a gamble without losing your stake.

The state pension is another form of investment opportunity that the UK government has made available to its citizens. Until fairly recently, people purchased portions of state pension by making national insurance contributions. For each full year contributed, men purchased 1/44th and women 1/39th of a state pension from the ages of 65 and 60 respectively.

The state pension is paid for out of the taxes paid by current workers. National insurance contributions are commingled with current taxation to reduce the cost to the taxpayer, recognising that the operating cost of the state pension in the early years of its introduction will be lower than its cost in later years.

Premium bonds are only as safe as your belief that government is good to its word. Imagine that a future government decides to cancel premium bonds entirely. It simply stops paying out prizes. It tells bondholders that their bits of paper are now worthless. While you might not think it likely, can you imagine the outrage this would cause?

So I find it hard to understand why people are so relaxed about government breaking its state pension promises. As a man with some 25 full years' worth of NI contributions, I am well over half way towards a full state pension from the age of 65. But government is to tell me that it won't now pay it from 65. In fact it now looks like I'll be lucky to see any state pension at all before I'm 70. We wouldn't allow government to break its premium bond promises. So why are we tolerating such a flagrant breach of promise in respect of the state pension?

It would greatly add to complexity, but a fairer way forward would have been to recognise the years already bought and to honour those promises. So, in my case, government would have honoured my 25/44ths of a pension from 65, while informing me that it would not be able to offer me such generous terms in future. So I might have to accept future accruals in 49ths from age 70.

In many ways, government breaking its promise in respect of pensions is far more egregious because employed people are obliged to pay national insurance whereas people can choose whether to invest in premium bonds. So while government is about to renege on tens of billions of pounds of promises in respect of those who are still working, the big question is - why are we letting them do this?

Filed under: Politics with tags government, national insurance, premium bonds, state pension
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The over crowding of our classrooms also emphasise how silly it is to give academy headmasters salaries of £240,000 which are more that 100% bigger than starter teacher salaries.

Here. You can be pretty sure that teachers don't earn £120,000 in their first year. In fact, a first year teacher in London earns £27,000, so that academy headmaster earns 789% more than a starter teacher. Of course, I don't really have a view ex ante as to what an appropriate multiple of a junior teacher's salary would be appropriate for the headmaster. If you went out and hired 7 teachers instead of that headmaster, would the school really run better? No, of course it wouldn't.

The rest of the article is idiotic too. Without knowing more about the way schools are run in other countries, the pupil-teacher ratio may not tell you very much. Here, schools now employ teaching assistants to help support teachers. I know for a fact - because Mrs Malry used to teach there - that French classrooms often don't have teaching assistants at all. I don't know what the position is in other countries. But when I was at school, classroom teaching was one adult per room only. Obsessing about pupil-teacher ratios, without taking into account the other improvements in staffing and pedagogy is unlikely to yield helpful results.

Update:

He has modified his calculation to say "more than 1000% bigger" than the out-of-London starter salary of £21,558. Good to see I'm having an impact.

Filed under: Other blogs, Politics with tags eoin clarke, france, idiots, mathematics, teachers
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Thanks to Shot_fox for making it happen...

George Brown? o_O

I suppose this means that George Osborne can always shrug off idiotic accusations of class war by claiming that he's just changing tax laws.

Filed under: Politics with tags gordon brown, idiots, pensions, polly toynbee, quote of the day, richard murphy, ritchiebollocks
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As a chartered accountant, I get a certain excitement that lesser mortals cannot fathom when opening a set of accounts. Accounts are intriguing; they tell a story and sometimes contain secrets if you're smart enough to unravel them.

So, a day after flipping through the audited Whole of Government Accounts, I'm scratching my head trying to work out just what these accounts are for.

There are two main schools of thought when it comes to accounts. The dominant theory, currently preferred by the main standard setters, including IASB and FASB, is that accounts should contain information useful to enable ordinary people to decide whether to buy or sell shares in the reporting entity. The other theory, which has fallen out of favour but still has some high profile advocates, is that accounts should supply information to owners sufficient to allow them to exercise stewardship over their company.
Neither of these really fits WGA. You can't sell your 'shares' in the UK; even selling the closest thing you've got to a share - your vote - is illegal. So the notion of WGA in informing a buy/sell decision is ludicrous. And the accounts are so long and complex that they're very unlikely to factor significantly in individuals' voting decisions in 2015.

There's a further, and worse, problem. These accounts relate to the year to March 2010. That's nearly two years ago, and relates to the previous, Labour government. The qualifications in the auditor's opinion, referred to in yesterday's blog post, cover decisions going back into the previous decade. So how meaningfully are these going to make government more accountable?

It's good that government has made the effort, and that it has tried to follow a stern set of accounting standards. But these accounts do leave one wondering: just what is the point?

Filed under: Accounting, Politics with tags fasb, government, iasb, stewardship, whole of government accounts
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