Hamish McRae: The growing public-private divide

The chasm in attitude between the private and public sectors is wider than at any stage since the 1970s. The London tube strike coincided this week with the effective end of Cheltenham & Gloucester, now owned by Lloyds Bank, and the collapse of the rescue plan for LDV. As a result 1,660 jobs will be lost at C&G, while last Monday more than 800 lost their jobs when LDV was put into administration. Yet on the tubes there are no redundancies and talks apparently broke down over the reinstatement of two workers, not over pay or jobs.

The 1970s ended with the infamous "winter of discontent". Mercifully we are not facing disruption on that scale, at least not yet. But in public finance terms the imbalance between the private and public sectors is even greater than it was then. Public spending as a percentage of GDP will approach 50 per cent next year, maybe exceed it if some new calculations by Professor David Smith of Derby University are correct. In a new Institute for Economic Affairs pamphlet he estimates that spending will hit 53.4 per cent of GDP. Back in 1975/6 the peak was 49 per cent.

Of course any democratic society can choose to spend a larger portion of its income on public services rather than private services. Sweden, for example, sustained spending at above 50 per cent of GDP for some years. But tax levels have been high enough to pay for that at around 47 per cent of GDP. In Britain the highest tax level that we have reached during the past 30 years is 38 per cent of GDP; last year it was only 36 per cent and is now falling as revenues collapse. Though this government has a reputation as a high-tax operation it has been very unsuccessful at raising revenues.

Nor has the government been successful at getting value for money from its spending. Yesterday the newly-independent Office of National Statistics revealed for the first time what has been happening to public sector productivity under Labour. The figures are from 1997 to 2007 and they show that over this period productivity has actually fallen by 3.2 per cent, or some 0.3 per cent a year. The only area of public services where productivity has risen has been in social security administration.

The only ray of comfort is that productivity did rise a little in 2006 and 2007, the last two years for which figures are available, as the flow of funds into public services slowed down. By contrast, productivity in the private sector has risen by an average of about 4 per cent in manufacturing and around 2 per cent in private sector services. There are other aspects to the growing imbalance than just resources and productivity. The most marked of these has been the divergence in three areas: pensions, pay and job security.

Public sector pensions have remained much the same in terms of their structure, though the burden on future taxpayers has been increased by the rise in the numbers of civil servants, the increases in pay at the top end of the scale and of course rising life expectancy.

That last point is of course common to both sectors. But private sector pensions have been savaged by a whole string of additional factors. The first was the change in taxation on pension funds brought in by Gordon Brown in his first budget. A second has been the abysmal performance of shares during the past decade. Third, there has been the fall in the interest rate paid on government debt, which has had the effect of increasing the pension pot needed to sustain any particular level of pension. Finally other tax changes, in particular the cap on the size of a pension pot anyone in the private sector can save for, means that it is impossible for anyone in the private sector to accumulate as good a pension as a senior civil servant automatically acquires.

The second gap has been over pay. The normal practice in the private sector has been a freeze on pay. Something like half the companies in the UK have imposed this, or are planning to do so. At the top end there have been sharp cuts, party through the reduction in or elimination of bonuses. (Though those salaries were pretty high to start with and the people could well bear the burden of a pay cut.) But leave the top aside and pay increases have been minimal.

By contrast public sectors have had continued increases in pay, though some settlements have been at or below the rate of inflation. The overall numbers are that total pay in the private sector is currently running 1.2 per cent down on last year, while pay in the public sector is increasing 3.6 per cent.

But the greatest divergence has been in job security. The entire burden of recession in terms of job losses has been carried by the private sector. The government has presented its policy of borrowing heavily to maintain employment and demand as helping the country pull through recession but actually it has been protecting one part of the economy while shifting the burden to the other. Employment in the public sector last year rose by around 50,000 every quarter; employment in the private sector fell some 280,000.

So what will happen? All past experience shows that a society cannot sustain such an imbalance. It cannot be sustained politically. But it cannot be sustained socially either because we all see it as unfair. We have seen how society reacts to the unfair nature of pay-offs for failed bankers. We are seeing the reaction to the way politicians have sought to reward themselves. We will increasingly see it in the way the public sector is rewarded relative to the private sector, as we did in the 1980s.

I hope this can be managed in a decent way. I hope the inevitable cuts in public services can be carried out in such a way as to protect the most vulnerable employees as well as the most needed services. But those cuts are inevitable. They are implicit in the Labour forecasts, though in all probability they will have to be carried through by the Conservatives.

Yet as the clash comes, there is no doubt who will eventually win. It will be the private sector. It has the big battalions. Though public spending is approaching half of GDP, much of that spending is in the form of transfers from one person to another. If you look at employment, at the end of last year there were 5,783,000 public sector workers. But even after the job cuts there were 23,596,000 private sector workers. Public sector workers are outnumbered five to one.

h.mcrae@independent.co.uk

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