Sorry folks, but there\’s a horrible mistake in these cost estimates.
The government faces a multibillion-pound bill to close up to 180 quangos and in some cases it could be a decade before any savings are felt, according to documents that show the scale of the struggle the Treasury is facing to cut the deficit.
Truly a terrible one.
The Audit Commission alone, which the communities secretary, Eric Pickles, has axed, is facing nearly £500m in liabilities. A letter from the chief executive, Eugene Sullivan, to the permanent secretary in Pickles\’s department and the National Audit Office warns that the costs include £75m in redundancy packages and £15m in contracts for rented properties. There is also an estimated £400m in pensions liabilities.
Spotted it yet?
Standards for England, the local government watchdog, receives an annual grant of £6m, but the costs of scrapping in terms of its pension liabilities alone could be up to £12m.
Yes, well done. Pensions liabilities.
These are sunk costs: we already owe these sums to the staff who work in said quangos. If we keep them going we not only owe these sums we also accrue further liabilities as each further year of service gives rise to further pension liabilities.
If we close the quangos then we do have to pay the accrued pension liabilities: but we don\’t accrue any further ones.
What this report is really doing, by showing us these accrued pensions rights, is showing us how much more expensive the quangos are than the usual figures tell us. For they are revealing not just the ongoing operating costs but those very pensions obligations which are accruing.
And the first rule of accountancy when dealing with sunk costs? Yup, ignore them in your decision making about the future.
So the £400 million from the Audit Commission, the £12 million from Standards for England, these numbers, because we already owe them come what may, should be ignored in our calculations of whether we should continue to run the Audit Commission or Standards for England.
We should only consider the extra pensions liabilities which will accrue from continuing to run them. Which, as above, seem to be rather larger, and thus closing them down saving more money, than commonly thought.