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Dangerous Stratagems

Dangerous Stratagems

Institution:

Date:

 

Weaknesses in each strategy.

  1. Delay maintenance and replacement of assets— and rely on hope.

For capital intensive processes, this stratagem results in the ultimate higher expenditure on insurance premiums, labor, and unplanned downtime of equipment and costs of unscheduled maintenance. This practice compounds the risk of equipment breakdown, loss of property or life and often leads to equipment unserviceability or perpetual failure.

  1. Sell assets.

This stratagem continuously reduces the organization’s net worth of disposable assets and poses a threat to future factors of production and options. Selling of state or government property in an attempt to cut the disparity between the revenue collected and the budget deficit should only be considered as the last resort and not as a long term plan because it is unsustainable.

  1. Lease rather than buy equipment.

This stratagem presents immense ineffectiveness in the process of asset management planning as it restricts the organization’s capability to deploy and utilize the equipment efficiently due to constraining conditions often included in the lease agreements. These constraining conditions introduce federal, legislative and business bureaucracies which interfere with the management of the leased equipment.

  1. Rob Peter to pay Paul.

The Robbing Peter to pay Paul stratagem is detrimental to the organization’s debt situation as it creates an illusion of fewer debts. This in turn predisposes the organization to more credit access. In the long run, the organization faces a barrier to economic mobility with huge annual budget deficits and more debt crises caused by the revenue volatility, credit facilities diminishing and the general degradation of social safety nets.

  1. Nickel and dime employees.

This unreasonable reduction of public or corporate expenditure leads to the reduction of the quality of public services like healthcare and education. This leads to poor service delivery and inadequate training of the labor force. The long-term effects would be human capital inadequacies and a restrained economic growth.

  1. Make across-the-board cuts rather than targeted cuts.

This stratagem results in a lot of job losses and clipping of mainly social amenities spending from the organization. Ultimately, these actions affect the economy negatively as consumers spend less hence lesser tax incomes and revenues earned.

  1. Fudge the numbers.

The intentional misrepresentation of budget figures often leads to incorrect budget predictions, government over borrowing, fiscal unsustainability and stagnation of interest costs despite decreasing in debt levels.

  1. Borrow.

The issuance of bonds does not usually result in much benefit to governments. The huge borrowing increases the overall debt which is followed by more debt-interest payments each year. Eventually the debt becomes a significant part of the budget. As interest rates soar, the issuing and servicing new bonds becomes more costly which leads to crowding-out.

  1. Use accounting gimmicks.

The use of accounting gimmicks prevents governments from making well informed decisions and accurate assessments of the present fiscal situation, possible dangers to fiscal outlook and the cost – benefit implications of any policy alteration. Lack of fiscal transparency also denies the citizen and legislature the opportunity to make accurate financial decisions and oversight the government on the use of public finances.

Most Dangerous strategies

  1. a) Accounting gimmicks

Empirical research shows a strong correlation between lack of fiscal transparency and measures of fiscal unsustainability which are high government deficits and debts. Governments that rely on the accounting gimmicks stratagems run the risk of negative market representation of fiscal solvency. This practice results in the suffering of their credit ratings, credit default swap spreads and foreign borrowing retribution from investors. Eventually, the international market looses confidence with the government mainly due to hidden deficits in the government’s budget. The overall increase of foreign sovereign default risk is utmost dangerous for any government.

 

  1. b) Delay maintenance and replacement of assets

This is generally a dangerous method of operation. It is difficult to predict equipment failures and outages. When left unplanned the material and labour resources in the event of a failure may prove to be an expensive expenditure. Lack of proper maintenance also reduces the asset’s life with the associated indirect costs impacting on the overall budget, safety requirements, compliance to industry ordinance and ultimately the service delivery and revenue generation process.

Least Dangerous strategies

Lease rather than buy equipment.

Leasing is essentially not a capital expense but rather an operating expense which spreads out the cost over a longer period. This arrangement enables governments to provide services and collect revenues quickly and systematically without incurring heavy acquisition costs. Leasing results in higher operational efficiency and short-term savings in maintenance and labor expenditures. The leaseholder also enjoys reduced costs of disposal, risks of operational ownership, economies of scale and frequent asset replacement with technological advancement.

  1. A recent example of each strategy.
  2. Delay maintenance and replacement of assets— and rely on hope.

The 2005 Texas City Refinery Explosion was mainly attributed to failure to correctly calibrate the level transmitter, complete failure of the high level alarm system and failure to clean and maintain sight glass.

  1. Sell assets.

In the fall of 2010, New York’s Mayor had a huge budget deficit dilemma. He resulted to selling 16 city buildings including the Newark Symphony Hall to supplement his revenues.

  1. Lease rather than buy equipment.

Baltimore City Government signed a ten year $33 billion equipment lease agreement for a   new Communications System which delivers seamless communication to their public safety agencies.

  1. Rob Peter to pay Paul.

In the 2011-12 fiscal year, the New Jersey budget makers supplemented the general fund with $4.7 billion from the New Jersey unemployment compensation insurance fund. At the time the economy was performing well with unemployment claims being low.

  1. Nickel and dime employees.

From 2011, Florida’s cities have instituted nickel-and-dime cuts in order to make more budget savings. Winter Park for example has had to stop buying hot dogs for the Fourth of July festivities and Deltona no longer providing dog-poop bags for city parks

  1. Make across-the-board cuts rather than targeted cuts.

The Budget Control Act of 2011 (BCA) effected across-the-board expenditure cuts which require annual $109 billion cuts shared equally by the defense and non-defense programs to achieve a total deficit reduction of $1.2 trillion.

  1. Fudge the numbers.

The Congressional Budget Office deliberately ignored many major costs like the increase in the number of uninsured people by doing away with pre-existing conditions clause since people will wait until they get sick to buy insurance. This eliminates the $143 billion savings that was key for the Democrats to pass the Obama care.

  1. Borrow.

Every year the federal government treasury bonds are oversubscribed. They are sold at different maturities and the treasury department must budget for the interests to bond holders.

  1. Use accounting gimmicks.

In April 2014, the Centers for Medicare and Medicaid Services reported that the congress double estimated the forecast health care spending cuts and posted them as savings. When this accounting gimmick is corrected, it increases the overall medical expenses by $89 billion over ten years.

References

Grover, S. (2002). Managing the Public Sector, 9th Edition.  Harcourt College Publishers.

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