Today I draw the attention of the reader and his dog to two Treasury doctrines which produce perverse consequences.
The first relates to European structural funds grants (mainly from the European Regional Development Fund). Despite the expansion of the EU, there is still a substantial amount of this money available for the UK. And it is distributed on a competitive basis, so we have to bid for it: how much we get depends critically on whether we come up with decent projects. This is not easy: rightly, to dissuade fraud the European Commission has put in place elaborate procedural requirements, and to ensure that projects are worthwhile they also insist on match funding from other sources. But these are not the worst impediments. The Treasury has also put in place a major barrier to people who might otherwise be prepared to put in the effort to get money for the UK from the EU: they insist that if a UK authority gets EU funding then the money involved must be deducted from that authority’s existing allocation of public funds. Thus people who labour away on these complex bids for their communities find, in effect, that their communities get no benefit at all.
The rationale they cite is the need to control public expenditure totals. One can readily think of a number of more effective ways of tackling this problem. But the Treasury will have none of these. A few years ago, this deeply frustrating policy led to the resignation of the Welsh First Minister. At a more humble level, I myself was involved more recently, in one of the most depressed and remote villages in Scotland, in a bid to restore the harbour, the only project with a chance of generating life-giving tourist income; I saw the project founder on the local authority’s awareness of the hopelessness of trying to get European funds. If this silly rule were replaced, additional grant would flow; it could be not only a lifeline for the poorest parts of the country, but also a useful way of getting more of “our money back” as Mrs Thatcher used to say.
The second issue relates to VAT. In general it is only business enterprises which can register for VAT, and reclaim the VAT on their purchases. An exception is made for local authorities, who are able to do this as well. But no exception is made for Government departments or public bodies (there will of course be fewer of the latter in future as a result of the recent quango cull; but, in general, work which needs to be done will still have to be done by somebody). Services bought by anyone are subject to VAT, but salaries they pay are not.
This has perverse consequences. If a Ministry needs to have a new IT project done, it has a choice: it can employ someone to do it (perhaps from its own IT team), or it can engage a consultant. In principle the overall cost of the two (including sick pay, training, workspace &c) ought to be similar: the Ministry ought to be able to choose the best person. However, it would have to pay VAT on the consultant’s fees, but not on employing its own staff. The result is likely to be that it either engages a consultant at considerably higher cost (losing funds which could have gone to other worthwhile projects, or been returned as an underspend), or reassigns in-house staff who are experienced in something else and not well suited to the work involved. In the former case the will of Parliament that a certain level of resources should be given to certain services will be undermined; in the latter there is a higher risk of inefficiency or waste. Bizarrely, there is no benefit whatever: even if the VAT is paid, the net position of the Exchequer is exactly the same, as the money is simply going out of one pocket and into another.