Private and public sector cuts

The endless rows over “cuts” at a time when public spending continues to rise in cash terms highlights yet again the totally different approach to public service by the private and public sectors.

In 2008-9 many private sector companies faced declines in their revenue of 25% or more. This was all far more horrific than the cash figures for the public sector this year and next. I do not recall these companies appearing in the media telling us they would have to take lumps out of their service to customers, identifying in public ways they could make their service or product worse, or proposing strikes to complain about the loss of public revenue support.

Instead they got on with the difficult but essential task of bringing costs down to meet the reduced revenue. Managers and workers worked together to reduce stocks, cut costs without damaging customer service, accepted pay freezes or even cuts in remuneration for the bad times, lost pension benefits and bonuses, negotiated cheaper purchases from suppliers. They often also at the same time worked on how they could improve their service or product for customers.

I am pleased to see the government seeking to cut out the inessential, and press the message of value for money within the public sector. Councils, the remaining quangos, MPs and others need to learn the same approach.

This entry was posted in Blog. Bookmark the permalink. Both comments and trackbacks are currently closed.

30 Comments

  1. nonny mouse
    Posted July 9, 2010 at 8:05 am | Permalink

    The same arguments can be made for the school building program. If the private sector had a building program and the banks suddenly refused to offer mortgages then it would stop building. Sadly, with the schools program the government faced with the same situation decided to carry on building but to fund it out of the regular budgets, which is kind of like a business using a bank overdraft facility instead of a mortgage.

    The schools were being funded with off balance sheet PFI and when the banking crisis hit banks ceased funding PFI projects. Instead of cutting the progam the Labour government took over funding the program out of on balance sheet debt. Darling then cut the capial budget that paid for it but Labour carried on promising that they could build the schools anyway.

    In all the talk about the school building program nobody seems to mention PFI. Is the PFI issue being kept quiet because they dont want to deny Ed Balls the leadership or is the coalition scared of publicising the PFI liabilities?

    A post on PFI would be greately appreciated. Should we continue to use PFI to finance capital spending? Is there a way to bring PFI onto the balance sheet?When will banks start funding PFI projects again?

    • Colin
      Posted July 9, 2010 at 9:24 am | Permalink

      I was under the understanding that PFI was a cynical way for governments to move debts out of their balance book. The private company then charges an overhead for the privilege, which the taxpayer pays off as rent or a leasing arrangement.

      If this is correct then funding something with a PFI would be more like a business using a credit card rather than a bank overdraft facility. I believe PFIs are not in the taxpayer's interest.

      • nonny mouse
        Posted July 9, 2010 at 1:37 pm | Permalink

        Your description of a PFI sounds about right. My comparison with a mortgage was not very good, it is probably closer to a lease with maitainance included in the payments.

        I share your suspicions about PFI. Thy are good for polticians because they are off balance sheet, but are bad for soundly financed, transparent government.

        PFI is just another form of borrowing, but without it being recorded like regular deficit borrowing. The fact is that the Conservatives introduced them to the UK in 1992. Labour originally opposed them, then used the to build hospitals and schools when they got into power.

        I always hear the government debt figures being bandied about, last time was on Question Time last night, but presumably these dont include PFI commitments so we have no real way of knowing how much the country really owes after Labours spending binge without searching for the information.

  2. Jack
    Posted July 9, 2010 at 8:05 am | Permalink

    Mr Redwood – please can you give us an actual example of a commercial organisation from your own constituency that reduced its budget by 25% and how it achieved that? Moreover, how that firm is doing now. Thank you.

    Reply: I do not have a constituency example, but if you look at what happened to manufacturing in the recession you will see many which cut their workforces and the pay bill, slashed their purchases of components and supplies, stopped their capital programmes etc. Demand collapsed and they had to conserve cash. Such firms are now recruiting again and experiencing rising orders.

    • Alan Jutson
      Posted July 9, 2010 at 9:11 am | Permalink

      Jack

      Not sure of the exact figures but JCB gave its workers the option of a 4 day week or redundancy for many.

      The workers chose a 4 day week to spread the pain.

      The Company retained its skilled workforce, the workers retained their jobs, albeit on a lower wage.

      Company and workers live to fight another day.

      JCB exports products all over the World.

    • Mick Anderson
      Posted July 9, 2010 at 9:24 am | Permalink

      Two of my clients made changes of this scale. Both started the recession with about 20 staff.

      One gave the staff a choice of redundancies or short time. The staff chose short time and worked a 28 hour week for more than six months. This company has now recovered to its pre-recession work load.

      The other gave the staff no choice and made half of them redundant in one workshop. They then moved staff from another factory to fill some of the shortfall, effectively reducing the staffing by about 25% in both locations. This company is still struggling, and I doubt if the workshop that took the brunt of redundancy will still exist at the end of next year.

      Both companies are in the south east of England. The former is family owned and well run. The latter was bought out a couple of years ago by an organisation that didn't really understand what they were buying.

      Neither are in Mr Redwoods constituancy.

    • StrongholdBarricades
      Posted July 9, 2010 at 10:08 am | Permalink

      plus, were these "cuts" provoked by actual customer demand, or actually inspired by the banks who sought to deleverage everybody at the same time?

  3. Alan Jutson
    Posted July 9, 2010 at 8:44 am | Permalink

    Your reasoning is correct.

    It is the Media and the Labour Party who are stoking up all the fear.

    Perhaps someone could ask them what the additional 1,000,000 public sector workers do, that was not being done before.

    Some silly comment made on Question time last night that it is better to pay someone to dig a hole, and then pay someone else to fill it in, rather than pay unemployment benefit.

    Would have thought it would be better just to pay someone to fill in the potholes in our roads, so that traffic could move more freely and without damage.

    • waramess
      Posted July 9, 2010 at 10:45 am | Permalink

      Better still we might insist on a days work being a precondition of collecting unemployment benefit.

      The government should always be able to find them something useful to do, (Unappealing idea of what that might be left out)

  4. Brian Tomkinson
    Posted July 9, 2010 at 9:02 am | Permalink

    Perhaps you will have the opportunity to make these points on 'Any Questions' tonight, although you shouldn't expect any acceptance of your views by Jonathan Dimbleby or the audience which often sounds skewed towards Labour supporters.

  5. Norman
    Posted July 9, 2010 at 9:19 am | Permalink

    A quote from some union chief yesterday I heard yesterday regarding pensions:

    'The government is trying to drag public sector pensions down to the level of those in the private sector'

    The public sector is no longer there to service the needs of the productive private sector, the roles have been reversed. Welcome to statism.

  6. Robert
    Posted July 9, 2010 at 9:48 am | Permalink

    You are absolutely right. It is very distressing for employees of any organisation to experience a reduction in their income through shorter hours, salary cuts and smaller commissions or bonuses; still worse to face redundancy. Believe me, I know. But the private sector enterprises that make these decisions survive and flourish as they adapt and in the long term are able to increase output to the benefit of employment and prosperity. The reaction of the public sector unions to cutbacks – to threaten to hold the country to ransom as they did in the 1970s – is the perfect demonstration of why as few public services as possible should be run by the public sector. It also demonstrates what a disaster 13 years of nulab was, by building up the tail of the public sector so it can wag the dog of the country .

  7. Richard1
    Posted July 9, 2010 at 10:00 am | Permalink

    There is an important difference: in almost every area public services provided by the state are monopolies, whereas private sector companies provide public services in competition. The most important discovery in economics is: where the consumer has choice and competition there is (usually) keen pricing and a good service, whereas where there is no choice and competition the reverse is true. The Government should go full steam ahead to introduce choice and competition throughout state-provided public services. Free schools, management/employee buyouts of services are the way to achieve this.

  8. waramess
    Posted July 9, 2010 at 10:40 am | Permalink

    You are right. Just look at the New Zealand example or look at how a liquidator acts. Cut and cut fast otherwise you leave the bleeding hearts to start pulling strings.

    It is not about whether it can be done painlessly but more about grasping the nettle and in so doing not demoralising the remaining employees.

    Whether this government will stick to their guns remains to be seen

  9. forthurst
    Posted July 9, 2010 at 11:13 am | Permalink

    I believe that the private and public sectors are not comparable. The private sector responded to a reduction in demand, as Mr Redwood so rightly states, without a fuss but this is how the private sector operates: it attenuates its supply capacity to match as far as posible its demand in order to achieve the first rule of business.

    The public sector has not received a reduction in demand from the public. On the contrary, the provision of public services is determined by central planning which is very capable of over provision of services which are either ignored or even deeply resented. Furthermore, there are often deep inefficiencies in the maner in which services are provided; these can often involve highly complex chains of command with such objectives as ensuring that no English person should be advantaged as against somebody who just stepped offf the plane from Timbuktoo to claim asylum or that (someone who is not very bright-ed) should should have 'equal opportunities' to become a brain surgeon as someone who is very bright.

    So the challenge facing the government is to prune the provision back to healthy wood and further ensure that providers who attempt to harm the public by cutting what is essential in order to engage in political point-scoring are shown the door.

    For example, Mr Gove was right to deal with the BFS issue as a priority, but he should not now be deterred from taking an axe to the whole educational establishment with employment of any individual not within the context of a specific educational establishment up for review whether at central or local government. The very best schools (all private) manage without external agents other than the board of governors, although they are unable to prevent jobsworths poking their noses in under statutary authority.

  10. Ronnie S
    Posted July 9, 2010 at 12:50 pm | Permalink

    I work 2 days a week advising small and medium sized businesses(50+ per week) 2 days I work with the public sector and 1 day a week I am a volunteer with schools. In the last 2 years I have advised literally 000s of private Co's on lay offs because they could not afford redundancies and employees wanted to keep their jobs.Most of those employees are still on reduced pay . Meanwhile in the public sector I have seen appointments made in the last 6 months at salaries in excess of £100,000 for jobs that were already being done and a school that has received £1m+ from BSF and is uable to fill its places . It's a mad world.

  11. Javelin
    Posted July 9, 2010 at 1:49 pm | Permalink

    I think the Government needs to start to express it's relationship with the public sector differently. This should be an understanding that the public sector revenue is taxes and when taxes fall below costs then costs must fall. The premise for endlessly borrowing money is that taxes will have to rise. If we were to spend the proceeds of growth in this cycle paying of our debts and not cutting costs then in the next down turn the debts would simply start to mount up again.

    The truth is Labour and the Conservatives have increased spending for decades. What is needed is a more flexible public sector workforce who get used to expansion and contraction OR accept that it must be a lot smaller.

  12. Alan Jutson
    Posted July 9, 2010 at 1:57 pm | Permalink

    Honda in Swindon (getting closer John)

    Layed off workers for a few months, now back in Production, and top of the reliability league (recent survey) for Motor cars.

  13. Brian
    Posted July 9, 2010 at 2:06 pm | Permalink

    When the last Conservative Government began to use PFI in a modest way Gordon Brown called it "a cynical distortion of the public finances". And when he became Chancellor…..?
    Talking of cuts in working hours….. I was in the USA during a recession some years ago and a famous hi-tech company had to cut back. Everyone was reduced to a 4 day week and lost 20% of their salaries. Except anyone with "manager" in their title who had to work a full week with the same loss of salary. That company is still a world leader.

    • Simon
      Posted July 10, 2010 at 10:16 am | Permalink

      Two companies I've worked for had to implement pay cuts because profitability was down .

      There were redundancies too so the same amount of work had to be done by less people working harder and longer and being paid less for it .

      When I bought my house I purchased one I could afford even with periods without income .
      The people around me stretched themselves and now find themselves out of work and the taxpayer is paying their mortgate interest .

      There has been no incentive to live within your means or buy only what you can afford with the result that many cannot stand even a 10% wage cut .

      There needs to be a correction and acceptance that in the real world people do get hurt by their bad decisions .

  14. Posted July 9, 2010 at 5:07 pm | Permalink

    This is where, in a truly socialist state, the populace would be able to band together and take the collective hit to minimise the damage. Less hours worked, as Alan Jutson points out, to ensure a job is retained.

    Until Cameron changes direction, however, we're left staring at the possibilities of a left-run state in a time of crisis: (ref to a site link which did not work – it does help if people summarise the point for readers – ed) <

  15. Berkshire resident
    Posted July 9, 2010 at 5:13 pm | Permalink

    Review council spending – no chief executiveor senior manager should earn more than the prime minister. And stop sending in highly paid consultants to tell staff how to work smarter. Most front line workers just want to get on with the job without having to schedule meetings with time-wasting idiots who will earn six figures for a 6 month contract. We'd get twice the amount of work done!

  16. David B
    Posted July 9, 2010 at 5:36 pm | Permalink

    You have to tackle the ministry of propaganda. Privatise them. Do we need any more than Radio 4 and BBC1?

    I switch off regularly. I refuse to listen to the unsubstantiated, lefty nonsense they bombard me with regularly. Your government has to tackle them urgently.

  17. Vandriver
    Posted July 9, 2010 at 8:48 pm | Permalink

    This is the first time I have read this blog, and I have read it while listening to Any Questions on Radio 4.

    I agree with comments above – the audience seems to have a left wing bias. John Harris seems to be so very biased I am surprised he was invited on to the programme.

    The fact is – the Country Is Broke. If a family is broke they don't go out and buy a car; they retrench and squeeze every penny before spending it.

    My grandfather never earned more than £5.00 a week. They had three daughters. They were poor. They grew their own vegetables where possible, he rolled his own cigarettes (and lived to be 85) and never owned a car. He commuted from Dorking to Brockley – a bus, train and bus journey. If he was going to be late home, he sent a postcard and it got home before he did. They had no hot water and no bathroom, and an outside lavatory. They were married for a very long time and were very very happy.

    Where have we gone wrong?

    • Alan Jutson
      Posted July 10, 2010 at 9:34 am | Permalink

      Vandriver

      Peoples expectations are now in many cases unrealistic.

  18. Lindsay McDougall
    Posted July 10, 2010 at 6:18 am | Permalink

    How we cut public expenditure is also important. The public have the impression that reductions in the public sector work force will be by natural wastage only. The Minister of Education has given the impression that a large part of the schools building and repair programme has been put back by a year at least. This is a dangerous combination. It suggests that public sector capex will be cut in order to protect public sector jobs.

    A way out of the dilemma is to say to the civil service that the total remuneration is going to be reduced by a specified % in real terms over the course of the parliament. You can influence whether that is by a salary freeze, a reduction in pension rights, or loss of jobs. That % should be big enough to give real capex and maintenance expendite a degree of protection.

    If you are looking for easy pulic expenditure reductions, how about Tony Blair's security budget, which is out of control. Tax payers pay this, I believe.

  19. Mark
    Posted July 10, 2010 at 5:24 pm | Permalink

    I read that the census is to cost a total of £482m, of which allegedly £300m has been spent. I find it difficult to imagine how a few civil servants arguing about which questions to include and how the form should be designed could possibly cost so much. I suspect that were the whole enterprise to be cancelled, a much lower cancellation fee could be negotiated with those companies who have contracted to provide services on the basis of the costs they have actually incurred so far. The decision to cancel doesn't rest on just the remaining £182m not yet "spent" (although presumably the real cost won't start to mount up until forms are printed and distributed, and computer equipment is actually purchased and staff engaged to transcribe and analyse the data): much greater savings should be possible (I'd guess less than £30m has truly been spent in a non-recoverable way).

    A similar principle applies to many other areas where cancellation might be considered, or where cost reduction ought too be possible. Re-negotiate the contracts.

  20. Posted July 10, 2010 at 8:54 pm | Permalink

    I feel that what is needed is a much better communication method around the cuts. The understanding of the difference between the private and public sectors cuts needs to presented. This has to be done meaningfully and practically to people in the public sector. The negativity being generated is huge.

  21. Posted July 12, 2010 at 7:43 am | Permalink

    The private sector do just get on with very accepting of what ever faces them. The public sector however are in danger of letting the standard of service drop if they do not look at a better way of delivery, they could learn so much from the private sector instead of feling negative towards it (in my experience).

  22. sm1
    Posted July 13, 2010 at 1:35 pm | Permalink

    MP's etc need to lead by example as do House of Lords.

    Significant Headcount cuts in MP'sare needed now, before the year end, not in 5 years, at the next election.

    Applying rules properly on expenses is no substitute.

    The lost MP's vote can be handed to the nearest MP of the same party or call an election for that new area. I cant see it affecting the coaliton numbers.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page