Thursday, 19 March 2009

The bloated state questioned at last

I don't watch Question Time every week, indeed today was the first time I have caught it for over a month because either the panellists have included people guaranteed to boil my highly pressurised blood or the programme has come from outside England. Tonight I was looking forward to Tessa Jowell having to talk about the economy on a panel also including Ken Clarke and Vince Cable. She was, not surprisingly, hopeless. What really caught my ear, however, was the regular spewing of common sense from a cheerful plump lady called Fern Britton.

Apparently Miss Britton presents a daytime television programme. I didn't know that, but I did know her to be the daughter of the excellent actor Tony Britton and to have hosted a cookery show some years ago. Whatever the topic raised this evening she would smile benignly, issue a little sigh and say the obvious. Not for her any dogmatic spin or party-line soundbite. On the recession she informed us that if we borrow money we have to pay it back and doing so will mean a reduced standard of living if we have borrowed too much. I'm sure I heard a rustling of paper in the background as she let that bombshell go, perhaps it was Tessa Jowell looking for a briefing paper to see whether the government's current line of spin agrees or disagrees with Fern. On public spending Fern told us that it all has to be paid for so we can't have everything we might want any time we might want it. At this point poor Tessa went green, I don't think she had ever heard of such a concept. And so it went on, topic after topic. Music to my chubby little ears.

It is a happy coincidence that today also saw a heavyweight newspaper feature the unaffordability of the bloated State on it's front page. The Times brought to the fore an issue discussed often in the world of blogology but rarely, so far, in the more widely-witnessed world of the major news media. At long last the endlessly expanding State is seen as a problem not a solution. Seeing the State as a benefit is giving way to an appreciation of the dead-weight cost it attaches to the rest of the country. The argument is being played-out in a range of different circumstances, but a common theme underpins them all. Wages are being cut in the private sector in a bid to keep businesses afloat, wages in the State sector are increasing. Jobs are being shed in the private sector to cut costs or because a business has folded completely, the State sector is recruiting more people to shuffle paper. Private pensions have been, and continue to be, macerated while State sector pensions remain unaffected (in fact some are run as private pension schemes, hence calls from the government's financial backers in the powerful State sector unions for the Treasury to bail them out). Many other examples can be given. Miss Britton addressed all these points by making the simple observation that things have to be paid for.

An interesting snippet contained in one of the articles in the Times estimates that a rise in unemployment of one million is likely to cost the Treasury about £15billion a year through a combination of increased benefits payments and decreased tax revenues, with up to a further £3billion of reduced revenue from loss of taxes when wages are reduced in the private sector. I haven't seen the workings behind this estimate, but a cost of £18billion for the loss of one million jobs equates to £18,000 a head. It might well be that the calculation is based on the loss of enormous numbers of financial sector jobs which paid high salaries and, therefore, provided substantial tax revenue. It might also include knock-on effects such as reduced VAT receipts when those who are out of work are not spending as they previously did. However it is worked out, we can be sure that a saving would be made by the private sector employers who made those million people redundant, even though they would have to make substantial severance payments to many staff. That saving will preserve many more jobs provided the businesses concerned are able to survive current difficulties.

On the State making someone redundant it is hard to see that there will be anything other than a credit on the Treasury's ledger. Any benefits payable to an ex-State employee will be a fraction of their salary (in all but the very rarest of cases) and the income tax and national insurance they paid was neutral in the account because that money came from the Treasury in the first place. Take someone aged 35 on a salary of £30,000 who has worked as a civil servant for ten years. After the Treasury has paid itself tax and national insurance out of this gross salary, he will actually cost something around £23,000 to employ. His redundancy pay will be £3,500. The saving will be around £19,500 in the first year minus anything he receives in benefits (minus also knock on tax losses through him not spending as he did before). The same person in the private sector would cost the Treasury lost income tax and employee's national insurance contributions totalling about £7,000, plus lost employer's national insurance contributions of around £3,800. Benefit costs and lost knock-on effects would be the same. So, a private sector redundancy of someone of that age and on that salary costs the Revenue around £10,800 in the first year whereas a public sector redundancy saves around £19,500. In any subsequent years that he remains unemployed the figure of £10,800 stays the same but the figure of £19,500 goes up by the size of the one-off redundancy payment to £23,000. These figures are very rough and ready but they give an indication of the inescapable fact that thinning the private sector reduces net government revenues whereas thinning the public sector increases them.

Faced with the spectre of government borrowing of a size that would require massive tax hikes to be imposed when the recession is finally over, it seems obvious to my simple mind that the government should seek to reduce its revenue shortfall and thereby reduce the debt hanging over the post-recession economy. If this message gains momentum, as it might do now that The Times has dipped its toe in the waters, it might become politically feasible to question the very existence of a majority of State employment. More importantly, we might have the debate that really needs to be held into the benefits the wealth-producing private sector could provide if only it were not held back by the dead-weight cost of paying for the bloated and unproductive State.

It's a very unpleasant debate because it involves arguing that people should lose their jobs. I don't want to see a single diligent person joining the dole queue, but the issue is not about individuals it is about structure. Where a structure is fundamentally flawed it must be corrected. In the real world that impacts on real people. But if you cower away from the correction because it will be unpleasant for some in the short term, you can be assured the problem will only get worse. One day it will have to be addressed. The longer it takes, the more unpleasant the outcome will be.


Mark Wadsworth said...


That's why you are Minister In Charge Of Sacking Three Million Superfluous Public Sector Employees.

Mr said...

An excellent read, Mr Bigot.

james c said...

Fat Bigot,

Once again you get it completely wrong.
Sacking civil servants is not the medicine that is needed at a time of hugely deficient aggregate demand.

Even if they produced absolutely nothing, the saving in salary would be completely offset by a reduction in demand.

Mark Wadsworth said...

@ James C - this is a misconception.

Ultimately, the true cost of an unproductive quangocrat = the value of goods and services that he or she could provide in the free market PLUS the deadweight costs of the taxes on the productive economy required to pay his or her salary PLUS deadweight costs of any associated regulatory burden.

It seems fair enough to take the cash cost of a quangocrat's gross salary as a proxy for this (because notional income tax and NIC deducted = value of pension contributions), I agree that the true cost might be less than this - but I'd guess it is much, much higher!

james c said...

Mark W,

As I said previously, in a time of hugely deficient aggregate demand, slashing public spending will be counterproductive as it will reduce aggregate demand further.

It will make the recession worse.