Part 2: From Jaws to 'The Claws of Doom'
This is the second blog attempting to move beyond what I see as a flawed 'Jaws of Doom' narrative. An earlier blog on this topic can be found here and an overarching piece (my last column in the Birmingham Post) here.
I have made my criticism of George Osborne's austerity drive clear in my blogs here at the Birmingham Post. His 'Plan A' was a huge error which has left the economy at best flatlining. He should have had, and should now be pursuing a 'Plan B'. The cuts coming down from central government are having a profound effect on the likes of Birmingham City Council.
But as I argued in my last blog, the city council itself needs to avoid cutting too far too fast on the basis of speculation as to future financial position and a hyped-up 'Jaws of Doom' narrative.
Realistically the council should only consider the position of the next 2 years. After then, there can indeed be planning, but it must be on the basis of different scenarios and at least a Plan B (and probably C and D).
Yet as noted in my last blog, Sir Albert Bore is pushing ahead with his own 'Plan A' and is right now preparing to fundamentally restructure the council and its economic profile. There does not appear to be any other Plans in town (or city).
In fact, a series of 'Service Reviews' of Birmingham City Council's services and spending is now taking place and it is these reviews which are expected to take the strain of the alleged 'Jaws of Doom' via decomissioning cuts - prompting speculation of a pay-as-you-go 'Easy Council' along the lines of Tory-run Barnet council.
(As noted in my last blog, Barnet seems to be having quite an impact here in the higher echelons of the Birmingham Labour Party, what with the 'graph of doom' come 'jaws of doom' and stripped-down 'Easy Council' concepts entailing decommissioning. See here for debates over how far the Barnet model might go).
It is intended that these service reviews will reduce the size of the council and its operating costs radically. In fact they will do the heavy work reducing the Council's 'jaws' by £212million by 2017.
But I would argue that the only budget game in town has to be to plan specifically until 2015 (a new 'Plan A'), prepare for 2015/16 in 'Plan B' and leave 'Plan C' until the outcome of the election in 2015 is known.
In a recent Birmingham Post piece (see here), Shadow Chancellor Ed Balls said he couldn't 'guarantee' that and in coming Labour government (if elected of course) in 2015 would reverse the cuts. That doesn't mean that a Labour government wouldn't in fact do something to ease the pace of fiscal contraction - merely that Labour couldn't guarantee this in advance.
Fair enough - but as Balls said in the piece that current macroeconomic policy is so utterly dire (owing to the speed of fiscal contraction) then one wonders what Labour will offer differently if they don't ease the pace of cuts - what exactly will Labour do to differentiate itself at the 2015 election?
To repeat, prepare until 2015 seems the key message.
In an earlier blog I criticised the 'Jaws of Doom' as a useful concept for financial planning. But what I would like to do in this blog on the topic is to argue that the most pressing problem is not so much the 'Jaws of Doom' but the 'Claws of Doom'.
These are the pressures closing dangerously down on the council from factors beyond its core services role. In particular, it has to review very seriously, fundamentally, and immediately those areas of spending which appear to be protected by outsourcing and contracts for services with big business.
The budget, in the context of severe revenue cuts, is in danger of having been captured by these contracts. They seem ring-fenced and must not be. They must surely come first when it comes to bearing down on costs pressures - and well before core services are touched for fundamental review.
The problem at the moment is that one of the Claws of Doom is a massive talon indeed - the council's ICT and public contact system in the shape of Service Birmingham/Capita. It has got to a stage where the council is spending around 10% of its entire controllable budget on them. That is unsustainable.
Unchallenged and expert analysis at scrutiny level in the council (see here) has already identified that over £120million a year goes the way of this contract, when it was anticipated by the previous Tory/Liberal administration that it should only be costing the council in the region of £55million, the schools ICT service aside. And £55m is, in any event, far too much.
The council has to look at this as a priority in its first service review and, it being such a significant figure, implement it immediately, and then undertake other core services reviews only when this massive ICT spend is dealt with. If ICT service failures are identified, then the BCC must prepare to dispense with it.
The council has to decide whether it exists to provide an ICT service to itself and plough a tenth of its budget into it, or that it is there to provide statutory and other local public services. The tail appears to be wagging the dog.
The council has to bring its ICT spend under control and radically down to less than £55million per year. That contract should be brought back in house, and/or other West Midlands ICT businesses should be invited to bid at well below the current cost.
The same has to be said of the council's other contracts and PFIs with the likes of Capita, Amey, Morrisons, Wilmott Dixon. They must be subject to immediate and severe review.
If just the ICT spend of the council can be reduced by £50million annually in 2014-16, and significant other cuts to the other private sector contracts are made first, then the Claws of Doom will be released and the service reviews of other services becomes less pressing.
They can be planned for, but left to form part of a new Plan B or C, if the 'worst' happens if whichever government is returned in 2015 continues to squeeze the revenue as badly as predicted by Sir Albert. The wasted cost implications of jumping too early on the core services only to resurrect them again also need to be borne in mind.
One aspect of the financial position which (presumably because they were not asked) the University Review did not consider was the issue of asset sales in the short and long term. Asset sales have recently been linked with the council's Equal Pay headache, with Pickles apparently insisting that these sales should take place instead of capitalising borrowing to pay off the claimants.
There is little doubt that the council could make hundreds of millions by selling large chunks of their assets portfolio. Whether tied to the equal pay claim or not, these could significantly affect the budget position of the council. Again, the council has to determine what it is there for; is it a business and buildings holding corporate institution? Or is its job to provide services? Does a local council need to own large equity stakes in infrastructure like Airports, Convention Centres and the like and, anyway, wouldn't the world's pension funds be clamouring to buy them up, if offered?
The asset portfolio has to go substantially first in any new 'Plan A'. Sales of enough assets to say, realise £300million would allow the council to release any charges and borrowing against them and, when it comes to equal pay, sales to fund would take a chunk out of planned future borrowing, already priced into future budgets, and hence could help relax the jaws of doom.
It's not as simple as flogging assets off to generate cash, as Paul Dale rightly points out here. But assets could be sold to create funds for investment to generate a return - feeding through then to the revenue account. Alternatively it could help to pare down the city's debt, free up the cash that was going on interest payments, generate a 'war chest' to boost the local economy, and much more. Plus the council should be lobbying Eric Pickles for maximum freedom as to how the funds from asset sales could be used. He may be willing to listen - see here for example.
In addition, shrinking the size of the council too quickly may actually have its own unintended consequences for future funding. By decommissioning over-hastily, the council could prompt deeper government funding cuts, precisely because it is a smaller entity.
I don't envy Sir Albert and the other Labour councillors in their difficult decisions, but it is this academic's view that Sir Albert's current Plan A, of shrinking the council drastically starting next year, as a response to speculative punts on the future, is flawed.
Put these proposals into plans B and C. And instead of decommissioning whole swathes of public services, BCC should instead deal with the 'Claws of Doom'. Tackle them and also sell off assets, and the 'Jaws' look far less significant than the current Doom-laden narrative suggests.
Professor David Bailey works at Coventry University Business School