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.