Business

What are private-sector lessons for Osborne?

BBC business editor Robert Peston on the planned public-spending cuts

I am escaping from the Heironymus Bosch hell of central London on a day of tube strike, to what I hope will be the still-functioning metropolis of Birmingham.

That's where the Chancellor, George Osborne, will attempt to reassure delegates at the Tory party conference that his planned public-spending cuts, to be unveiled in higher definition on 20 October, are not as bad as they seem.

If implementation ushers in the kind of industrial action that has brought the capital to a standstill, the transition to a leaner, meaner, state may not be without trauma.

But I was particularly struck by these remarks made by David Cameron to the News of the World:

"Let's put these cuts into perspective. Many businesses have had to make far great reductions than us in one year".

Hmmm. Is that so?

Well it's certainly not true in respect of the absolute monetary value of spending reductions, £83bn over four years (which include the unspecified cuts of £52bn that the previous government factored into its budget forecasts).

And nor is it true of the sheer variety and diversity of operations that will be pruned and axed: there's no private-sector conglomerate in the world that provides the dizzying number of services of the British public sector.

But what about the proportionate reductions: between 25% and 40% for most departments (excluding the protected health and overseas aid budgets, and the semi-protected defence budget, which "only" has to find 20% savings)?

Yes it's true that private-sector businesses, big and small, have periodically been obliged to slash overheads and costs to that degree.

There are typically two cases where that's happened:

1) where a business has been seconds from insolvency and creditors have demanded draconian cuts as the price of not putting the business into bankruptcy;

2) where some kind of commercial genius has taken control of a business and spotted how to radically re-engineer the delivery of a service or product.

Now is the UK in the first category? For all the imperative of reducing the public-sector deficit, probably not. I don't think George Osborne would say that the UK is one minute before midnight in a solvency sense.

What about the second category? Well for all the talents of ministers and civil servants, what they're not are the Google boys, or Lou Gerstner - saviour of IBM - or Jack Welch, who reinvented General Electric.

Also, quite apart from the skills gap between a typical British politician and messrs Gerstner and Welch, there's an interesting disparity of time frame: the reconstruction of GE and IBM were relatively organic processes which lasted the best part of a decade, punctuated periodically by big disposals, job losses, acquisitions and outsourcing.

So what's a better private-sector analogy for what Mr Osborne and Mr Cameron wish on the state?

Well, the cost-cutting programme at Royal Bank of Scotland looks relevant.

How so?

With the generous support of taxpayers, it has time to reconfigure itself to become more productive - so that in time it can generate the profits that would allow taxpayers to be repaid.

And it is well into a programme of three to four years to reduce costs by £2.5bn, involving the loss of around 30,000 jobs.

It's an enormous undertaking. But those £2.5bn of savings represent just 15% of so of running costs - less even than the relatively protected Ministry of Defence has to find.

One similarity between RBS and the classic public sector (some would argue that RBS is actually part of the public sector, with taxpayers owning 84%t of it) is that it was pretty flabby.

Its current directors say that the nickname of the previous chief executive, Sir Fred "the shred" Goodwin, was a misnomer. They insist he did relatively little shredding of costs as he expanded the balance sheet.

Even so, they say that the 15% cuts are at the limit of what they can achieve without impairing the quality of service they provide.

Which carries an unavoidable implication, which few private sector bosses dispute when I discuss it with them: if you're cutting up to 40% from a budget, either you have to stop providing certain services or the quality of services provided will suffer (or both).

Update 1505: So what did I take from George Osborne's speech to his party's conference?

1) The FATwa on banks is still in place. That's FAT for Financial Activities Tax, which he'll levy if banks pay humungous bonuses without providing sufficient credit to wealth-creating businesses. But he didn't specify either what an acceptable quantum of lending would be or what would be tolerable pay for bankers.

2) Much of his rhetoric was about directing public spending to those areas that will stimulate private-sector growth - viz transport infrastructure, medical research, "green" investment, and so on. This has to be more than a woolly aspiration: without an expanding private sector, to offset public sector shrinkage, we'll be back in recession before you can say "defence of the AAA rating". But the business people I meet here would much rather have a bonfire of planning controls, another Heathrow runway and immigration caps - which populist politics have deemed to be off limits for the coalition.

3) Osborne has no intention of simplifying his public sector reconstruction ambitions: reform of delivery and budget cuts are partners, not alternatives, he insists. But reform almost always brings up-front costs, which may be huge. Think about the IT for new GP commissioning of medical treatments, or rewards for private-sector contractors that help those on disability benefit acquire the confidence and skills necessary for work, or the redundancy costs of reducing the labour component in some service provision. I am very little the wiser about where Mr Osborne will find the funds for what is in effect a huge investment to secure desirable but intrinsically uncertain long-term productivity gains.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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