What causes inflation?

The day that the Chancellor caps public sector pay whilst prices rise for all manner of commodities seems like a good day to think about what causes those prices to rise in the first place. I'm not an economist so I'm not as well placed to explain this as many. But this article by John Harvey that I found on the Forbes website does a very good job indeed.

Now might be the time to step back rather than forward

Across the country public sector organisations will be getting into the swing of their budget process for the 2012/13 financial year. The chances are that they will be following an incremental process. They'll start with what they know—this year's budget—and add to it estimates of the changes in prices and policies that they are confident will happen between now and March 2013 and then they will identify ways balance the inevitable gap that will open up between their forecast levels of income and forecast levels of spending.

Incremental budgeting has strengths and weaknesses. One of its strengths is that it is relatively stable, year on year, and it is relatively easy to explain to politicians and the public how the budget for next year was arrived at. The downside is that it is implicitly based on the assumption that this year's budget was right in the first place. There is no challenge made to it.

What this means is that over the last years and decades public organisations have moved forward year to year in a fairly steady, and I would say safe, way. If everyone (more or less) has accepted this year's budget and we have not changed it much then the chances are they will accept next year's. But, as the cartoon above illustrates, sometimes moving forward in small increments, even by inches, can have disastrous consequences. That is, when you're at the edge of a precipice it might be prudent not to make a step.

So, if we are not to use incremental budgeting what else might we do? Let me use an analogy that Ron Heifetz used in a talk I saw him give at Warwick Business School last year. He described how the leader of a group of chimpanzees fulfils her role of solving day to day problems of where to find food, where to sleep and how to defend themselves from predators. These problems are what Heifetz calls transactional problems and the chimpanzee can learn how to solve them in an incremental way because of her experience. But what happens when a human hunter arrives with a gun? This is an "adaptive problem". The chimpanzee's experience might suggest attacking the hunter  but that (probably) won't work. An adaptive problem requires a different sort of leadership and a different solution. The chimpanzees need a leader that can teach them to run away and hide from the hunter.

Returning to budgeting, the incremental approach has worked for public sector organisations over the last twenty years or so when they have been asked to find small amounts of efficiency savings year on year but will it work effectively when faced with making cuts of ten or twenty per cent? I have my doubts. I think public sector organisations are facing an adaptive problem and they have to adapt to the environment if they are to be successful. That means trying different things and accepting the risk that some things will work and other may not. What I think that means in terms of budgeting is for organisations not to spend the next five months poring over spreadsheets showing marginal increases in costs and endless lists of marginal budget cuts. Instead, there needs to be a step back (away from the precipice) and a review of policies. If an organisation can identify a better way to achieve its ends without being constrained by a budget that says we should do what we did last year but try to do it a bit faster or with less people (that is, it can find an effective solution to the adaptive problem) then the budget can take care of itself.

A practitioner's experience

CIPFA_September_2011_for_web.mov Watch on Posterous

It's been ages since I last wrote a post for this blog. The last one I write mentioned I would talking at a couple of events organised by CIPFA.  I was asked to talk about my experience of making budget savings and that meant I spent much of my time pointing out what doesn't work. That said, I think the sessions went well. I certainly received nice feedback.

I've made a small QuickTime movie of the slides I used for those sessions in case anyone wants to see them or even download them.

I will try to get back into the swing of writing on this blog more often since there is plenty happening in terms of public sector finance as organisations face up to reducing their budgets for 2012/13. Perhaps I'll write about that next.

Strategies for managing your budget under financial pressure

CIPFA's Financial Advisory Network run many events and I'll be the speaker at two of them in the next couple of weeks. I'll be 'the practitioner' at the Strategies for Managing your Budget under Financial Pressure in Leeds on 21 September and London on 28 September. My brief is to talk about things I've done rather than espouse a lot of theory. That's quite a different requirement from when I teach at Warwick Business School where students want to know theory. Anyway, the new requirements meant I spent about 12 hours last weekend working on a 45-minute presentation. I'm hoping the result is worth it for the people attending the event. I've included an example of one of the slides here but you'll have to come to the event to find out what my point is. After the event I'll post a QuickTime movie of the presentation onto the web and post a link here.

PS. I'll take a few copies of my book with me to events and will happily sign them and sell them.

A budget geek and proud of it

The notion of budgeting seems to have begun in the public sector centuries ago, and I would say that even today it is a more important process in government organisations than it is in the public sector. Check out this blog post by a self-declared 'budget geek'. I feel the need to get some green eyeshades!

Let the train take the strain

Andrew Martin wrote an interesting article for the Guardian yesterday about the likely average increase in rail fares being 8% next January. This higher increase is possible because the Government has increased the upper limit for fare rises to retail price inflation (RPI) plus 3%, the aim being to reduce the overall level of subsidy paid by the government.

I like travelling by train. For anything beyond, say, 30 miles I would always look at the available train services. Even though I live in the country and my local station has trains every 2 hours to Manchester and Sheffield  during the daytime 

Partly I use trains to be environmentally conscious (check out 1% for the Planet) but mostly it is because of their practicality. If I drive then I have to concentrate solely on driving, I have to worry about the route and I have to find somewhere to park. Trains make things simpler, and I can read/work/watch a movie/sleep on the journey. And if my journey is solo then it will probably be cheaper than the cost of fuel, parking and wear and tear on my car.

In the recent past I have had jobs in both Sheffield and Manchester and in each case I have travelled by train because the daily return fares (roughly £10 to each destination) are about the same as the cost of all-day parking in the city centres. If those fares rise to roughly £11 each I would still pay them so, in one respect, George Osborne is right: rail users might be willing to bear the increase because the alternative is more costly whether in terms of money or time or practicality. But it is a bit like increasing the duty on tobacco and alcohol: it generates extra cash for the treasury because people do not change their habits.

That, though, is looking at train travel from the point of view of an individual. Taking society's point of view there are other factors. We have road congestion and pollution problems that could be eased by more people travelling by train. (Perhaps the congestion would be eased even more greatly if we reduced the movement of freight by road and put it on trains but that's for another post.) There is a case, then, for reducing fares to attract more people to use trains but this would have an impact on the economy in other ways. It could affect the sales of new cars, reduce the number of airline and airport jobs if trains are more competitive in the inter-city market. 

If the government were interested in social justice they might think that this is a price worth paying but I don't think they are. Balancing the books means spending less on railway subsidies and that means rail users have to pay more.