We can afford anything, but not everything

This Q and A by the BBC about public sector pensions makes an interesting distinction between whether public sector pensions are unaffordable and/or untenable. It reminded me of something that I would often say to councillors and managers when I worked as a finance director: "We can afford anything that you want to do, but we can't afford everything you want to do." That is pretty much the case for all public organisations. Generally they are big, with lots of money, staff, offices, computers and other resources so they could direct them to do almost anything that could be feasibly be demanded by society. The problem of public management is that society makes multiple demands and there have to be trade offs. If a pound is spent on service A, it is not available to be spent on service B. As the finance director of a large council I was, like my senior colleagues, looking for the councillors to make decisions about priorities against which we could allocate resources. The trouble is, for every decision someone is the loser. If you're elected to represent people it is very difficult to make decisions that make some of the people you represent worse off. It doesn't placate the losers to hear the politician say. "we had no choice" because, patently, they did have a choice and they made it. Unfortunately, this leads to politicians trying to avoid making decisions (despite every politician always claiming that they make the tough decisions whilst their opponents never make them). Such decision-avoidance is one reason that many organisations find themselves "salami-slicing" at budget time: ie they make (relatively) small cuts to every service/team/unit rather than protecting the budget of the most important and making large cuts (or abolishing) the least important services because if everyone is a loser in a small way then it's almost the same as having no losers at all.

Going back to the BBC article, it mentions that it is not possible to say public sector pensions are unaffordable because as a society we have not set out what proportion of public money ought to be spent on them. It would also be the case that if public sector workers did not receive pensions there might be higher salaries to pay now and in the future there might be more spending by government in state pensions and welfare benefits to workers who would no longer have as much money from an occupational pension to live on. 

So, it seems, after a year or more of the government saying we can't afford these pensions, the rhetoric is moving towards we don't want to pay for these pensions. At least that is more honest.

Don't cut spending; invest.

As a non-economist I think this blog article by Richard Murphy aboout why the cuts won't work is written in an understandable way. I remember from my accounting training that the classic response to a recession is for the government to invest but I had long forgotten the interconnectedness of a government's deficit with private savings and investment. Given that a government can influence but not control the latter hings it makes sense to concentrate on what it can control: investment. There are plenty of examples of such public investments being made during difficult economic times. Here's a couple of examples from my own experience: for five years I worked in Barnsley Town Hall, which was built in the 1930s to alleviate unemployment (and for which the councillors were surcharged for incurring the extravagant cost of a clock tower); and more recently, on a holiday in the USA I visited the Hoover Dam, which was constructed in 1931–36.

But if the government does not want to make expensive investments itself will the private sector step in and make them? It seems that the answer to that is, ‘No’, even when interest rates are very low. Forcing a company to invest is not a credible approach unless the government underwrites the investment and if a government were going to do that it might as well do it by imposing a tax on the companies and then spending the receipts itself. I am, however, attracted by Richard Murphy's proposal that pension funds should be required to make such investments. There's something appealing about one's pension being based upon tangible investment in the economy one works in rather than from speculation in complicated financial instruments traded in cyberspace.