Is the public or the private sector taking the bigger hit?


                We mainly hear discussions of the cuts to come in the public sector. The general feeling is the private sector had its bad time in the slump, wheh jobs were lost, pay frozen and short time working was common. Manufacturing has been recovering for almost two years now, with new jobs, full time working for more employees, and even some modest increases in earnings. The impression given in some of the media is that  now the public sector is suffering much more than the private sector.

              If, however, you look at “real terms” figures as the public sector likes to do, the picture loooks rather different. Private sector earnings are rising just a little above 2%. Retail price inflation is running at 4.8%. Total public spending is 7% higher than a year ago (May to November 2010).  On that basis, overall public spending since May 2010 is up 2.2% in real terms, whilst private sector earnings are down by 2.5% in real terms. This is still a wide gap in favour of the public sector.

             These figures relate to the end of last year. As we move into 2011 the hit on the private sector is bigger, as the 2.5% increase in VAT kicks in – an increase of 14% in the rate.  So in the first quarter of 2011 the squeeze on the private sector is getting tighter.

             Next year total current spending in the public sector will go up at a rate below the current rate of general price inflation. However, this need not translate into real terms decreases. If the pay freeze for all but the lowest paid works well, and if the initiatives to buy more economically also succeed, it would be possible to sustain  no real overall reduction in public spending. There will,, of course be cuts in individual areas reflecting general public sector priorities or poor management.

            Both sectors are in this together, but so far the private sector has been hit much  more severely than the public sector. The private sector has to get out of its own debt, and is being asked to pay more tax  to help the public sector reduce its appetite for more debt. There is no pain free way out of an overborrowed condition.The public sector does need to control its own costs better and contribute to the task of bringing the deficit under control. The private sector cannot take further hikes in the tax burden. We need tax policies which help enterprise and foster growth from here.


  1. lifelogic
    January 25, 2011

    The cuts in public sector can so often be a win win situation as so much of what they do is pointless (or worse still actually damaging to the overall economy). Cuts can thus release these people to do something productive instead of damaging productivity.

    It is a shame Cameron/Clegg clearly have no real understanding of this. Anyone who wants to spend money on a happiness index, green energy and high speed trains and forcing employers to keep the over 65’s employed has not quite got it.

    1. lifelogic
      January 25, 2011

      More desperate nonsense from the BBC on climate change in “Horizon”. They compare sensible people who, like most scientists, think human induced global warming is at least exaggerated somewhat to someone taking yogurt for his HIV condition.

      There is no consensus amongst scientist on this – most sensible ones think it is at best an exaggeration and largely now a religious/political movement. Also that the solutions (other than nuclear) such as wind turbines are hugely costly and do not really work anyway and that the money would be far better spent on things we know will do good now such as clean water, basic medicine, food, anti malaria actions, GM research and the like.

      Belief in AGW is now mainly in the emotion/religion/political areas of life not usually (though still sometimes) true science. It sits together with alternative medicines, anti nuclear, creationism, and anti GM crop beliefs, general religions and moves towards equality (of outcome), the politics of envy and big state socialism in general. The wind turbines are just the new rotating crosses of a brand new expensive religious belief system. The problem is the state is forcing you to pay for them even if you are not a non believer.

      1. Stuart Fairney
        January 25, 2011

        No consensus for sure, here are 31,000 scientists who agree with you and I that all is not as it is claimed

    2. lifelogic
      January 25, 2011

      And now 0.5% decline or “negative growth” as they choose to call it. Hardly surprising and that, I assume, is measured in the devaluing sterling currency?

      Can they please respond to all the points made by the outgoing CBI chief Sir Richard Lambert and stop kicking and handicapping business with the absurdly bloated, over large and incompetent state sector.

      1. lifelogic
        January 25, 2011

        At least they are blaming the “negative growth” on the cold weather and not Global Warming for a change.

        Though in fact the pointlessly expensive “green” energy policy will certainly have helped a lot to increase the decline along with most of the rest of the governments big state green agenda.

        You do need slightly more than getting rid (in part only) of nonsense Hip packs and the M4 bus lane. Osborn needs an axe not a jeweller’s screwdriver and if he waits much longer it will be too late for the next election.

  2. alan jutson
    January 25, 2011


    Can only relate to things in my industry (construction) and we have not seen things improving at all.

    Margins are at an all time low, enquires are not much better, people are shopping around (no problem with that) but then choosing not to proceed because of an uncertain future.

    Given that VAT has increased, the honest builder (who completes returns on time, pays Tax, Insurance and Vat) is now even worse off when competing against the cash merchant of the black economy.

    Given the above, I am now winding down my company as I approach retirement age, I would have wished to have carried on for a few more years, but it simply is not worth the risk of it any more, for the very small returns available.

    Public sector worker do not have a clue as to how the private sector have suffered over the past few years, as many conversations I have had with such people have shown. They look at you in disbelief when you say business is down by 50% as are wages, and that many self employed (in the building industry) have not had a full weeks work for a couple of years.

    Public sector cuts, what cuts when spending is rising.

    On another subject.
    I see Wokingham Council are looking to restrict rubbish collection to 100 bags a year (telegraph today) per family.
    Reported. If you have more, go to the tip yourself, or purchase more bags from the Council.
    Sounds like progress!
    Sounds green!
    Guess these are the same plastic bags that foxes rip apart !
    What is wrong with a dustbin ?
    Typical Local Authority thinking.

    Reply: They are thinking of limiting it to 80 bags a year, a move I do not support.

    1. Stuart Fairney
      January 25, 2011

      Do the council imagine they can stop fly tipping, or covert dumping in other people’s bins, or dumping in public or commercial bins, or back yard burning?

      1. Simon
        January 25, 2011

        It’s a damning indictment of our population that people would rather fly-tip than separate their rubbish .

        Once greater separation is enabled , does any family (other than one with young children filling disposable nappies) really need 80 bags a year for unsorted rubbish ?

        The council should issue extra recepticles for specific categories of rubbish and see whether people voluntarily separate their rubbish like the vast majority do on my road . They may then find that limiting the amount of unsorted rubbish (and the administration this would create) is unneccessary .

        Does anyone on this blog object to separating their own rubbish ?

        1. Stuart Fairney
          January 25, 2011

          If you had taken the trouble to read the post you would see this is not about seperation per se, it is about paying the council more money to collect your rubbish.

          But allow me to answer, yes, I object to sorting rubbish as its pointless. I don’t throw away gold bars as they have value, but there is a clue in the word “rubbish” So again, yes, I object to wasting my life rummaging through garbage. Feel free to do so if you want to. I shan’t.

          1. Simon
            January 25, 2011

            How is it pointless if it reduces the amount of rubbish that gets landfilled ?

            Many parts of the country have run out of landfill with the result that it is shipped long distances by road .

            Are you advocating that other people should pay for your share of landfill costs or is it such an inconvenience that are you would rather pay someone else to separate it for you ?

        2. a-tracy
          January 25, 2011

          I don’t object to separating rubbish we’ve had fortnightly collections for about six years. Squashing down plastic bottles can be a pain in the ankle though ;-). Storing the rubbish for two weeks can take up a lot of room too with a large bag for newspapers, two boxes – one for cans and bottles and one for plastics, plus a green wheely bin for general waste and a brown wheely bin for garden waste.

        3. alan jutson
          January 25, 2011


          We do recycle our rubbish, and such rubbish is collected once a fortnight

          We have weekly bin collections, so no, we do not use more (on average) than half a dustbin for our normal waste each week.

          The number of proposed bags depends on the size of the bag provided !

          But the point is, it is a dustbin, and whilst not foxproof it is a deterent receptical against foxes. Those who put out their rubbish in plastic bags at night (due to early collection often before 6.30am), often find such bags ripped apart, and the contents spead all over the road and path the following morning, by which time the dustmen have already been, and left it in the road.

          With regard to your comment about fly tipping, it does go on, and it is growing, the usual suspects are cowboy builders who feel that £200 to hire a 6 yd skip for use on site (includes landfill tax and VAT) is rather too much to pay. so they dump it where they can, as it keeps their costs down, and gives them an advantage on price over us rather more honest people.

          The more the landfill tax goes up, the more people you will get fly tipping , thus the more the council have to pay to clear it up, thus the more my Council tax goes up to pay for the clearing up my competitors rubbish.

          1. Simon
            January 26, 2011

            Hi Alan .

            Take your point about bins being far superior and bags being unsuitable . Maybe there are cases for different sizes of bin , my aging mother struggles to manouvre her wheelie bin .

            I reckon people will voluntarily separate household waste and that education is a better solution than restrictions to those who need encouragement to do it .

            I see simmilarities between dropping rubbish on the street , resistance to separating it , people putting their feet up on train seats etc – as a nation we seem to have lost our collective self respect . By and large I’ve not witnessed the same slovenlyness in America , Germany , Belgium , Israel or the Far East . I think it is a mistake to try and divorce this from the other challenges facing our country . A grass roots revival of our country stands more chance of being successful than a top-down .

            What prescriptions do you have for curtailing the activities of cowboy operators ?

            On the downside , you would no longer be able to sell your surplus approved bin bags to Stuart .

    2. lifelogic
      January 25, 2011

      Certain true in construction industry very little bank lending as sensible margins is the main problem and mortgages very restricted for the final buyers too.

    3. Brian Tomkinson
      January 25, 2011

      I see that construction suffered a 3.3% decline in the last quarter leading to today’s 0.5% shrinkage in GDP. You are correct when you say that the public sector hasn’t a clue about how the private sector has suffered. I don’t think politicians have either.
      Good luck.

  3. Javelin
    January 25, 2011

    The public sector hasn’t taken a hit … yet. It’s still growing, like a cancer.

    During the last boom, instead of saving New Labour just kept on spending. We need a single easy to understand concept or number to explain why this is NOT a cut but re-balancing.

  4. norman
    January 25, 2011

    Apologies if this is a double post, was redirected to a word verification page before and post seems to have disappeared.

    A spot on message as usual, and the tragedy is when the growth figures are announced today the BBC and Labour will only talk about how ‘Tory cuts’ are damaging the economy.

    I actually now have some sympathy with Labour that the deficit is coming down too fast. Not for the reasons they state but because this governments actions seems to be deficit reduction equals tax increases, and I’d rather have a few tens of billions more (on to the projected debt of around £1.5 trillion in 2015) now and don’t increase taxes any more. The taxes inheirited from Labour were already historically very high if anything they should have been looking at bringing down the burden on the private sector, not increasing it.

  5. Brian Tomkinson
    January 25, 2011

    If you conducted a survey and asked people if the level of government spending was the same, more or less than when Labour was in office, most would say less. All the talk of cuts has distorted the truth. When did politicians ever actually reduce government spending? Today’s Telegraph shows the scandal of the cost of PFIs. Not really a surprise to readers of this blog but so typical of the almost criminal way (it should be a criminal offence in my view) in which politicians have squandered tax payers’ money. If they are not taking it in tax they are robbing us with inflation. This government doesn’t seem to be any different.

  6. waramess
    January 25, 2011

    La la la la. What on earth do we expect from a socialist administration? If this happens and if that happens we will be OK.

    Nothing of the sort. It will not happen and you can be sure that like all socialist administrations they will be back to the tax payer next year asking for more. This is how we got to the state where the government spends more of our money than we do.

    The only saving grace is that with inflation rising and GDP falling our masters will be out of a job before this time next spring and the Conservatives will change the leadership for one that looks a bit more Conservative.

    They were foolish and badly advised to take on this mess in the first place, even had they an inkling of how they might sort it out, which they did not.

    The public sector will continue to grow and the private sector will continue to shrink until we have someone in office who knows what they are doing.

    I hate to think where we might be now were it not for oil production

  7. English Pensioner
    January 25, 2011

    I like these words from the Irish Independent”
    “The government cannot create jobs, it can merely provide employment at the taxpayer’s expense.”
    And unfortunately that is what a large part of the civil service is, simply employment, nothing else. It does not add to the economy in any way, but takes resources away, not only to support itself, but by placing unnecessary costs on business and individuals.

  8. Iain Gill
    January 25, 2011

    why dont you allow Brits to have the same tax and national insurance perks as foreign nationals here on ICT work visas get? would level the playing field a little?

    no? I thought not

    were are all in this together but some are in it a lot more than others…

    1. Simon
      January 25, 2011

      It’s hell in I.T. already and the Govt opens the door to more cheap labour from abroad .

      None of my friends in the private sector are earning as much as they were 2 years ago . Those who have not become out of work have all had paycuts .

      J.R. , is Teresa May hoping we’ve all forgot about Mode-4 or is there some hope of a reply to the issues you raised with her on our behalf ?

  9. Mike Stallard
    January 25, 2011

    Thank you so much for that – it is always nice to see that some people are out to preserve the area where the people live and work who pay for the Vulnerable.
    Is there any chance of removing the dead hand of bureaucracy? It seems to me, pace the EU, that that is just as bad as all the taxation.
    What if there was a carefully defined government free zone set up where there was neither tax nor any form of interference? Only joshing…..

  10. Acorn
    January 25, 2011

    As you mentioned previously JR, the inclusion of our new state owned banks in PSF, has made a big hole in PSND.

    “at the end of December 2010: net debt excluding the temporary effects of financial interventions was £889.1 billion, equivalent to 59.3 per cent of gross domestic product (£2322.7 billion, equivalent to 154.9% including interventions)”.

    The explanation is a good read as well. You will see that ONS still struggles to get info out of the BoE. Time to “audit the Fed” as Ron Paul would say?

  11. Richard Calhoun
    January 25, 2011

    It is very apparent that we have to make more cuts in our public expenditure, it’s a matter of when not if.

    If the Government has any sense it will enact more cuts this year and combine this with a privatisation programme of State assets, the obvious ones being the BBC, Canals, Forestry Commission, Network Rail et al.

    Alongside this programme of further cuts and privatisation they should introduce a Flat tax and a massive reduction in red tape for businesses combined with tax concessions for increasing employment.

    It appears fairly likely that we are currently on the way to stagflation which is not a good place to be

  12. Sally C.
    January 25, 2011

    Just wanted to mention that the Office for National Statistics and HM Treasury have just released their monthly PSF, or estimates of Public Sector Finances, which include for the first time complete data for Lloyds Banking Group and RBS. Basically, Lloyds and RBS have joined their illustrious forebears – that would be Northern Rock and Bradford and Bingley – in being finally incorporated into the net debt figures of the United Kingdom.
    There is no way to sugar coat these figures so here they are ; Northern Rock and Bradford & Bingley added around £130 billion to PSND or Public Sector Net Debt. Including the Lloyds BankingGroup and RBS in the public sector finances, adds around a further £1,300 billion to PSND.
    As a consequence, at the end of December 2010:
    • UK net debt was £2,322.7 billion including interventions, equivalent to 154.9 per cent of gross domestic product
    • UK net debt excluding interventions was £889.1 billion , equivalent to 59.3 per cent of gross domestic product
    It is impossible to overestimate how much the banks, and their overpaid bosses, owe to the UK and the US taxpayer.

    (refers to Barclays and Fed money-ed)

  13. a-tracy
    January 25, 2011

    So how does your party justify a lost days trading when a bank holiday could have been moved to celebrate the future King’s wedding or we could have had a Sunday wedding in a year of severe austerity. The timing of this bank holiday has also created a three day limbo bridge between two long bank holidays, planning for this is a nightmare, will it be like another Christmas week or will trade be as normal, will we need all the staff in or one third, clients are unsure too.

    Whenever we have tried to get an apprentice or funding towards necessary training the door has been firmly shut in our face, yet I read about large firms who get support regularly.

    Business insurance costs are going up and up, 7-10% on a range of policies even after obtaining several competitive quotes. Maintenance and parts costs are rising above inflation. Fuel (no more needs to be said).

    Increasing the taxation requirement to pay for extra public sector costs in paternity leave and increasing the cost of other necessary purchases like Gas, Electricity, Telecommunications when their costs rise because of this policy.

    Age discrimination legislation resulting in costs amending contracts of employment, advice from ACAS that you shouldn’t even ask if someone is planning to retire any longer! If workers in the public sector hold on to their jobs whilst drawing a final salary index linked pension and they go off sick for six months or longer how long will the taxpayer have to pay both sums for? If a male worker in the public sector takes five months of the parental leave will he get the same maternity/paternity payment as a female colleague i.e full pay rather than just SPL? What taxes will have to rise on the private sector to pay for this?

    As Alan Jutson said above the black economy is rising, when someone can slice 30% off your rate and you know their costs something isn’t right, they’re either leaning toward trading insolvently or not paying taxes.

    All of the big job losses I hear about are in the private sector, other than Manchester Council but I wonder what % of those being cut are taking voluntary early retirement on fabulous packages like our local councils did.

    1. John
      January 26, 2011

      It’s not just Manchester, local authorities all round the country are planning to shed tens of thousands of staff in total (700 at our local council). Not many will be getting “fabulous packages”, in many cases levels of redundancy pay are being reduced as well.

      What effect will that have on the private sector? Staff who lose their jobs will have to cut back spending severely. Even staff who survive will be cautious about taking on new commitments until they know their job is secure.

      The sort of wholesale public sector job-shedding that people on this blog are demanding won’t just hit the public sector, there will be a knock-on effect in the high streets, housing markets, leisure sector and so on. I just read today about a local builder who is cutting staff because no-one is buying or doing up houses, due to lack of demand and low confidence.

      The government is steering us towards an iceberg and Captain Cameron can only say “steady as she goes”.

      Reply: There is no need to have compulsory redundancies in the public sector to hit the cash spending targets required. So far job reductions have been below the numbers of people leaving voluntarily.

  14. Javelin
    January 25, 2011

    Just wanted to remind you of your growth forcasts (sub 2%) and mine (0.75%) which now look about right (taking the snow out the equation).

    ” Labour had recently hiked it [growth forcasts] to an unbelievable 2.75%. We concluded it was more likely to be below 2% once the debt bubble was blown away.”

    Posted June 3, 2010 at 8:25 am
    2011 – 0.75

    So you’re right in saying the Conservatives need to go for growth – but MY NEXT prediction is that higher interest rates are NECESSARY for growth. I believe the whole theory of very low interest rates leading to growth are rubbish. Interest rates above 5% might lead to a slow down but rates of 3% will lead to more savings and stimulate the economy. House prices need to fall to stimulate the economy before they can rise again

    Reply: Yes, the outturn last year of 1.7% is very much in line with my forecast.

    1. Acorn
      January 25, 2011

      Hang about there Javelin. As much as I would like higher interest on my savings, there are a few little fundamentals we have to contain first. What do you think will happen to all that BoE printed money if interest rates go up.

      The little people are holding “cash”. Corporates are holding “cash” The Banks are holding “cash” in BoE reserve accounts. The BoE is desperate to stop that part of the “monetary base” not in circulation, getting into circulation. If it does, get prepared to be paying £5 for a flat white at Costa. The last thing the BoE wants is all of us investing our cash in higher interest accounts that will go into circulation and get multiplied by the Banks.

      The BoE will have to haul in and cancel loads to shrink its balance sheet. That will not be easy, assuming they have a plan of how to do it. Get clewed up on the “exchange equation”; velocity of money circulation and cash holding in times of low interest rates. Huff has repeated a piece on exactly this problem:-

  15. Alte Fritz
    January 25, 2011

    The other week, it was announced that the default retirement age of 65 would go. The minister explained that this presented no problem for employers. If appropriate, they could use a capability review and then look to dismiss. I think the minister is a Conservative.

    Public service or large private sector employers will live with this partly becasue they have the resources to manage and pay for it if it goes wrong. What about the SME?

    In an SME, the process is likely to be much more personal, who wants to put a long standing employee under a capability review, and what of the cost if it all goes wrong?

    No one ever did a start up to have to jump through these hoops. A good employee over 65 will be kept on if they remain up to the job. If not, or if the job needs to be scaled down, it should be done by negotiation without the fear of having to go through procedures and possibly Tribunals.

    That is just one example of a governemnt imposed burden which SMEs have to live with and which take a manager’s eye off the main job which is to run a successful business.

  16. Lindsay McDougall
    January 25, 2011

    If the government, through reforms, reduces the demand for public sector workers, the law of supply and demand will dictate that public sectors salaries rise more slowly than hitherto, or even fall in real terms. We need to reduce the total public sector wage bill by at least 20% in real terms over this parliament.

    The trouble with the coalition is that they propose reforms that will yield savings in the medium term, but little in years 1 and 2. Lord, make me chaste but not yet.

    And beware the siren voice of Ed Balls, who apes Barack Obama in his thoughts but is luckily not in power. Continued fiscal deficits do not produce growth. It’s the Government red ink, stupid! If total government debt were to rise to 100% of GDP, how much would annual interest on that debt be? Round about 6% of GDP, or put another way 15% of total government spending. That’s not “investment”, that’s flushing money down the toilet.

    1. Simon
      January 25, 2011

      Lindsay ,

      Are you sure public salary levels are dictated by the laws of supply and demand ?

      If so then then surely it should be possible that they see their salaries cut like most people I know and see their pensions replaced with money-purchase private pensions .

      Isn’t that one of the essential differences between public and private sector ? The public sector is a law unto itself .

  17. Lindsay McDougall
    January 25, 2011

    PS: GDP growth

    Apparently, GDP growth fell by 0.5% in the last quarter of 2010. Well, retail sales fell by 5% in December due to the bad weather, so we should not be surprised. Also, construction activity is hit by bad weather. Watch out for a big rebound in the first quarter of 2011, in spite of the VAT increase.

    And a general warning on economic statistics: always ask ‘growth relative to what?’ There is year on year, quarter on quarter, and the latest quarter compared with the same quarter of the previous year. They are all different.

  18. Richard
    January 25, 2011

    The BBC have been asking Vince Cable this afternoon if the Government had a “Plan B” saying to him that the huge cuts in public spending were plainly causing rising unemployment and todays depressing -0.5% growth figure.
    The BBC were pointing out to Vince that the speed of the cuts would probably lead to a double dip recession and asking would there be a new policy of increased Government spending to revive the economy.

    I must say it sounded like very seductive and clever idea. (Only joking !)

  19. Geoff not Hoon
    January 25, 2011

    Mr. Redwood, Public Sector cuts are being announced virtually all over GB with many front line posts being cut back. Some weeks ago someone on this site used the word “spiteful cuts” and that certainly is what is going on in too many cases. Each day we hear of another record redundancy payout to a non job officer and the following Monday they are back in work as a consultant earning as much or more than before. A lady I know personally took a pay off from the NHS in three figures before Christmas and bought herself a new Porsche with some of the money, guess where she is now employed as a consultant on just the same salary as before. If sloppy central management by government doesnt spoil this term in office then high spending Labour/ Lib dem Council’s will do it instead. Why is noone getting a grip to a worsening situation and reputation.?

    1. Geoff not Hoon
      January 25, 2011

      I should have said six figures.

  20. BobE
    January 25, 2011

    In the early 1935’s Germany started to break the unemployment cycle by a massive increase in public sector projects and hence jobs. The Autobhann system was created. As 1939 loomed the money was running out and the state employed 90% of its workers. The only answer was a massive expansion into other teritories. Oh dear!

  21. Electro-Kevin
    January 25, 2011

    Much more needs to be done to ensure that public sector cuts are made in the right places.

  22. Javelin
    January 25, 2011

    Been shopping a few times in the past fornight – electrical and clothes shopping. The shop assistants all told me “its been completely dead.”

    You would have thought since the snow had melted that people would be queueing up at the tills – but that doesnt seem to be the case. It looks to me like VAT has had the significant psychological effect of giving people a reason to stop spending.

    So in answer to your question the private sector is getting hit.

    1. Simon
      January 26, 2011

      I feel very sorry that people employed in retail are suffering for this .

      Maybe it’s vindictive of me but I also feel a bit of Schadenfreude for the retail magnates who have been making a fortune importing tat from the 4 corners of the globe at a cost of British suppliers workers jobs .

      It disgusts me that they are regularly honoured with knighthoods or appear as TV celebs in programs like the Dragons Den .

      They sit on the top of the pyramid and have made the base sick .

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