The price of change

One of the things I like to include in my lectures is a set of questions that a public manager should ask their accountant/financial advisor to make sure that they are getting as full a picture as possible. I don't even think the public manager has to understand the questions (although, of course it is better if they do) but they should ask them anyway because they might find out something that they really need to know. A couple of examples of the questions: "what are the assumptions you've made?" and "have you done any sensitivity analysis?" This story suggests to me another question, one that Government ministers ought to have asked before announcing the closure of any organization: "what are the transaction costs?"

Transaction costs are the costs of making the change. It seems that the upfront cost of abolishing quangos is likely to exceed the first year savings. If a company were going to do a large-scale restructuring it might pay out a lot in redundancy costs and so on but swallow them in the name of future profitability. The cashflow might be a problem but if the plan for profitability is a good one the company could probably borrow the money. And there's the rub for George Osborne. What he wants is to reduce the country's deficit. Borrowing some extra money this year (and next?) to pay for the closure of all the quangos, restructure the NHS, etc is going to look like an own goal. There's no easy way out of the conundrum because the way to find the cash to pay the transaction costs would be to make yet more cuts but if he does that there'll be yet more transaction costs to pay!

As an aside, local councils have often found themselves in this position when they've had budget cuts to make and there is a procedure (under section 16 of Local Government Act 2003 if you really want to know) where they can request permission from the government to charge redundancy costs to their balance sheets, effectively putting off when they have to charge the cost against their annual budgets. I suspect lots of councils will be seeking this relief to prevent the cuts they have to make being even bigger. No such luck for George, though!