Dubious economics

Tweet I think that it was probably during the Thatcher years that the idea of preparing a 'business case' for anything and everything first came into vogue in the public sector. It was imported, of course, from the private sector which had been using the idea for a long time.

The principle is extremely sensible; before taking a decision to spend money, one should seek to identify all the costs and all the benefits, and ensure that the decision taken is a sensible one in financial terms. And over the years, I've written more than a few such documents myself (mostly in the private sector, as it happens).

In practice, most business cases are not written on a blank sheet of paper as part of an attempt to establish what the right approach is, but are drawn up after the real decision has been taken, as a basis for justifying that decision to those people who control the funding. The important decision is not the one taken on the basis of the presented business case, but the decision as to which business case to write.

One of the hardest things to do is to ensure that the suggested savings are genuine and honest. From my own experience, I know that there's an element of 'creative writing' in a lot of business case documents, particularly when everyone knows that the proposal is a good one, but some of the benefits are intangible. But it can also work the other way – figures can be chosen and presented selectively to get to the 'right' answer.

One figure that I've heard bandied about a lot recently (as part of schools reorganisation proposals) is the 'cost of empty school places'. The figure varies from county to county, as does the number of surplus places. Superficially, it's obvious that there is a cost to surplus places; but that which is superficially obvious isn't always necessarily convertible into a realisable cost saving. It was no surprise to see today that a campaign group has challenged the basis on which such business cases are put together.

I have long suspected that the 'cost of an empty place' is based on a pretty crude approach of dividing the costs of running a school by the number of places, and apportioning the costs then between 'used' places and 'surplus' places. The result looks good in a business case, but that is not, as Hyb have correctly identified, the same thing as identifying achievable cost savings.

Public authorities have come to depend on the 'business case' as their excuse for taking unpopular decisions, conveniently overlooking the fact that most business cases have actually been written in a way which suits the decision they wanted to take anyway. It's good to see that approach being challenged.

Black's Gauntlet

Tweet Peter Black accuses Plaid of being unwilling to pick up the gauntlet in the light of yesterday's story that Wales allegedly receives up to £9.1 billion more than is raised here in taxes.

His accusation is not entirely fair to say the least - after all, this is not a new story, and there was some discussion on the same news on this blog here and here some months ago. In fact the whole story is an old one – the figures being quoted were in a report published in July – and I'm fairly certain that it was covered by the Western Mail at the time. But I don't mind picking up a tossed gauntlet!

It is very easy for those who oppose independence to look at the report and simply say "£9bn black hole - how will you plug it". Responding to that involves considering the figures and the factors involved a great deal more carefully, and doesn't make such an easy headline, but I'll try again.

I start by accepting that, if Wales were to become independent tomorrow, the national budget would be in deficit. I don't know by how much – the figure of £9.1bn is open to significant questioning for a number of reasons, but the basic fact is that there would be a deficit. In reality, Wales is not going to be independent tomorrow, and the figures that count are those that pertain when independence becomes a realistic prospect. That means that discussion of precise figures at this stage is a somewhat hypothetical pursuit, but we don't have a better starting point. My response to the budget deficit is in three parts.

My first answer is – so what?

Lots of countries run a deficit budget for some or all of the time. The UK is budgeted to be in deficit by around £43bn for the current financial year, and that figure (according to the same report) is expected to rise to around £55bn in 2009/10. As a result of the recent financial crisis, some are suggesting that that figure may well reach £100bn. Does that mean that the UK is bust, and cannot survive as an independent state? No, of course not, and the mere fact that Wales is running a deficit doesn't make Wales unviable either.

In one of the comments on his thread, Peter suggests that this is not the same thing, because the UK is able to sustain this level of debt, but Wales isn't. And the basis for saying that is what exactly? It certainly is true that, for any country, there are likely to be constraints around the amount and duration of debt, but they're not black and white enough for anyone to be able to make this over-simplistic assertion.

Peter makes the point that "An independent Wales would need to spend additional money on social security and a whole range of other presently-non-devolved functions". Almost right, Peter – except for the word 'additional'. Wales would certainly need to provide such functions, but my reading of the Oxford Economics Report (available from this page) is that estimates for these costs (along with a host of others, including Defence expenditure) have already been included in arriving at the figure of £9.1bn.

The Oxford Economics report makes a valiant attempt to estimate total spend and total revenue raising in each nation/ region, and I think that the figures that it came up with are as good as any that we have. Some of them are inevitably estimates rather than actuals; but I don't have better estimates, and I cannot find anyone who does, so I'm prepared to accept them as a starting point for discussion.

But the report was never intended to answer the 'Is Wales viable?' question, and is therefore based on a big underlying assumption that things stay broadly as they are. Independence challenges that assumption, and means that there are a number of questions on the £9.1bn to which nobody really knows the answer, but which would certainly make a difference to the size of the deficit.

So, as the second part of my response, here's a couple of those questions for starters:

Would Wales spend as much on armaments and wars as the UK does? Under a Plaid administration, the answer would be no, and such a reduction would obviously narrow the gap between income and expenditure.

There are some civil service jobs in Wales which serve the whole UK (agencies such as the DVLA). But there are many more such jobs in England. Undoing the centralisation of administration in London would itself make a dent in the scale of the deficit.

The third part of my response is this:

Opponents of Independence always seize on studies of this nature to 'prove' that Wales is unviable, and 'depends' on England. But, even if we accept the raw numbers as being completely accurate and unchallengeable, one has to ask just how such a situation has come about in the first place. Surely any objective consideration has to at least entertain the possibility that a lack of independence just might be the cause rather than the solution?