Sunday, January 03, 2010

Pruning The Public Sector Paybill

New Year - New Resolve

2010. We'll get going by wishing BOM readers a prosperous survivable New Year.

Right, enough pleasantries - back to that fiscal hangover. With George's first make-or-break budget now less than 6 months away, we need a much clearer focus on precisely how he and Cam are going to deliver the spending cuts the markets are expecting.

As we know, the task is huge. Depending on whose sums you believe, to balance the budget, we need to cut public spending by between £100bn and £150bn pa. That's 15-20% of public expenditure, or £4-£6 grand per household.

To put it another way, if Cam/Oz fail to cut public spending, they will need to increase taxes by £100-£150bn pa. Which would require, say, increasing VAT to 30% and doubling the standard rate of income tax to 40p (see here).

So what to cut?

As we blogged many times last year, one of the prime targets has to be the public sector paybill.

When last sighted (2008-09), that was running at £160bn pa in cash terms - 11% of GDP. This year, we estimate that percentage has risen to nearly 12%, reflecting the decline in GDP and the fact that public sector employment has increased again. And this is a burden that has got a lot heavier through the years of Brown's reckless spending splurge, with record numbers of new public sector jobs and higher pay all round :

It's complete madness. And note that this definition of pay excludes the net accrual of future public sector pension benefits. They currently add a further £40bn pa or so (see here - Table D.1). So the true overall public sector paybill is more like 15% of GDP*.

But at least the problem is now getting some airtime. George has promised to freeze pay for public sector employees earning more than £18k pa, the LibDems promise a total freeze, and even Labour will impose a freeze on the top 40,000 (see here for a handy summary of main parties' cuts proposals, produced by - yes, of course - the TPA). None of that is enough, but it's a start.

And the msm are preparing the way. Today's Sunday Times reports its own investigation (see here):
"Public sector workers earn 7% more on average than their peers in the private sector — a pay gulf that has more than doubled since the recession began.

Official figures show that staff employed by the state are enjoying bigger pay rises, working fewer hours and receiving pensions worth up to three times as much as those in the private sector.

Civil servants, National Health Service staff, council officials and other public sector workers have enjoyed a “golden age” under Labour, according to an investigation by The Sunday Times."
They've also produced some neat graphics summarising the key stats:

So what's to be done?

In the IOD/TPA cuts paper published last September, we recommended a two year pay freeze for all public employees except soldiers on the frontline, a 5% pay cut for the richest 10%, and increases in employee pension contributions and various other employment benefit reductions. Over two years we estimated that would build up to a £16bn pa total saving, or around 10% of the cash paybill.

Nobody says it will be easy, and Cam will need to face down our militant and over-mighty public sector unions. But make no mistake - this is the scale of saving we will need.

And if we don't do it?

BOM's friend Ted Bromund at the Heritage Foundation draws our attention to an identical struggle now taking place across the US.

There too, heavily unionised public employees have been been "coddled and spoiled" (as the Economist puts it), doing much better than most private sector workers, and imposing a cost burden taxpayers can no longer afford. The average pay of a Federal worker is $71,000 pa, compared to $50,000 in the private sector. On top of that, the public sector still offers medical insurance, and the kind of pension entitlements most private sector employees can only dream about (see here). What's more, public sector employment has been pretty constant through the recession, whereas the private sector has shed 6% of its workforce (see here).

So what are US politicos doing about the problem?

Yes, that's right - they're doing everything they can to avoid taking on the unions. Which means that instead of fundamental reform (such as scrapping their expensive defined benefit pension schemes), they're resorting to stop-gap measures such as recruitment freezes and asking employees to take unpaid leave. In other words they're passing the pain on to their customers via reduced service levels.

But in the US, states and municipalities can go bust, which means that local fiscal problems go critical a lot more than we're used to here. At least one city has gone bust precisely because it failed to grip its paybill (the Californian city of Vallejo - see here). And there are now some signs of minds being concentrated and political resolve beginning to stir, with New York leading the way on sweeping pension reform.

So as we wait for George to show us that axe he's supposed to have, we'd do well to watch the US. If the choice is between taking on the unions and bankruptcy, the sooner we put down the markers, the better.

*Technical nerd note: the accrual of future pension benefits does not cost the government anything in current cash terms - the government simply accrues a liability to pay those benefits in the future. In effect, the government is funding part of its paybill by borrowing from its employees. But that doesn't mean the taxpayer burden is any less - it simply means we have even more debt.

PS Highlight of the Xmas period? No contest - PD James does BBC R4 Today. Tyler purred with delight as she ripped into Mark Thompson over BBC pay, schmoozed Jumping Jack Straw into bashing the police for becoming the form-filling pc non-police Labour always wanted, and gently roasted Sir Ian Blair for failing to keep us safe. Almost worth the licence fee. Can't they make her Today's editor for good?

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