Mark Dampier: Our bloated public sector must be cut

The Analyst

Regular readers of this column will know I sometimes stray from my main brief of highlighting funds and explore the wider economic landscape. Sadly, it's difficult to talk forthrightly about economics today without upsetting some people. This is because now, more than ever, it is impossible to separate economics from politics. I believe this country's finances have been utterly mismanaged over the last 10 years.

If we are to get our economy back on track in the coming years, we will have to make tough decisions. This includes substantial cutbacks such as removing two million people from the public payroll. This isn't as controversial a view as it no doubt sounds – when I made similar comments recently one irate reader wrote to say her fireman husband wouldn't rescue me if my house was on fire! I think, perhaps, I've been misunderstood.

Politicians, eager to quash any suggestion of spending cuts, have encouraged the viewpoint that public sector job losses must mean hordes of unemployed nurses, teachers and emergency service workers. That argument is disingenuous. The real drain on the public purse is the layer upon layer of middle management, bureaucrats – many of whom largely administer each other – and quangos.

The public sector recorded a net budget surplus of £4.5bn in 1998-99 and this rose in the next two years to £18.3bn. This was the period when Gordon Brown gained a reputation for economic prudence but, sadly for the country, his halo slipped in subsequent years.

The public sector deficit in the last financial year was a staggering £90bn and will rise to an outrageous £175bn this year. This represents a deficit of around 12% of national GDP – normally a 3% level is considered the sensible limit and we're miles beyond that stage now. (My thanks to Richard Jeffries at Cazenove for these figures.)

No government has cut the public sector budget since the Second World War, but I don't think politicians from either side of the House are being honest with the British public about the need for drastic cutbacks. Perhaps that isn't surprising a year before an election!

Essentially, we are living through a kind of phony war. The fact is this country is in a huge mess and it cannot afford its bloated public sector – the pension bill alone is over one trillion pounds and no money has been set aside to pay for it. Yet there is no serious debate about spending cuts – just the usual political finger-pointing and buck-passing.

The private sector faces the unpleasant prospect of at least another one million people becoming unemployed. I don't think it will be long before the nation begins to turn against public sector bureaucracy in a big way.

If you look at the debates on Question Time from 30 or 40 years ago they are the same ones we are having today. The truth is, everyone wants politics to stay out of essential services, such as the NHS. Power needs to be returned to the people who run them best – those involved at the grassroots and who are the lifeblood of these services.

Our money would be spent far more effectively by dispensing with the legions of paper pushers and focusing the funding on what really matters, and on the people best placed to affect change.

My comments shouldn't be interpreted as an anti-Labour rant – I'm not a fan of current Conservative policy either. This is an issue that should go beyond party political boundaries.

It may sound alarmist, but if our Government doesn't rise to the challenge in the coming years the UK could find itself adrift in political and economic terms. The emerging powerhouses of Asia won't wait for us to catch up; their economies are already forging ahead as we flounder.

From an investment point of view, we are in the fortunate position of having a vast range of funds to choose from these days. Plenty of UK listed companies will continue to do well in future, and the world is full of promising investment opportunities.

In future I'll return to your regularly scheduled programming and will look at a fund that I believe can prosper over the long term.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent