Is it the public or the private sector which has been squeezed?

As readers will know, when public spending is rising by £90 billion a year over five years, it is difficult to see why so many think the main adjustment to deal with our overspending is being made by the public sector. The truth is, that so far all the adjustment has been made by the private sector.

In 2008-9 the private sector lost 1 million jobs. The recession was deep. Many companies had to shed labour on a large scale in order to survive. The sudden lurch to too little money after years of excessive credit knocked the stuffing out of them, and in many cases halved demand for their products during the destocking period. Labour appointed 400,000 extra people to the public sector at the same time.

During the recession many in the private sector who kept their jobs lost their bonuses, and some even experienced pay cuts. Many had to forego the annual pay increase. Meanwhile, in the public sector, wages and salaries kept on upwards with annual increases.

In the last year it is true there has been a small decrease in public sector employment at a time when job growth has picked up in the private sector. Public sector wages have continued this year to grow more quickly than private sector pay.

At the same time as prospects in the private sector start to improve, the public sector has decided to increase tax rates and the tax take substanially to try to limit its own deficit. We have seen big increases in VAT, Income Tax, National Insurance and petrol tax revenue, accompanied by increases in rates. So far deficit reduction has meant squeezing the private sector more through tax, rather than cutting levels of spending.

There has to be some limit placed on how much the government does squeeze the private sector. The surge in world commodity prices on the back of the last government’s devaluation of sterling has intensified the squeeze on real wages, as price increases have leapt ahead of pay awards.

The budget needs to call a halt to the tax and inflation squeeze on the private sector. So far too much of the adjustment has fallen on the private sector’s shoulders. As the plan is to raise so  much more tax from the private sector in the next four years, it is important to cut the rates and relax the squeeze. It will only be through growth that the private sector can generate as much tax as the public sector wants. It is only by setting realistic tax rates that we will get the growth.

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21 Comments

  1. lifelogic
    Posted March 18, 2011 at 6:58 am | Permalink

    Ministers seem to have no idea how creating conditions for the private sector to thrive.

    Business can be put out of business so easily by excessive tax, regulation, energy costs and more expensive finance and suppliers. A company only needs to be very slightly less competitive than overseas producers to give up or go and never return. In the UK all the above are a severe problem.

    It is, as always, government by the state sector for the state sector. They only “listen” (or lie to) to voters once every 5 years then do what every they want anyway.

    So they press ahead with the daft High Speed 2, a mad energy policy, expanding the parasitic EU and more endless government at all levels, the well being/happiness nonsense, equality and human rights and more pointless wars.

  2. zorro
    Posted March 18, 2011 at 7:26 am | Permalink

    John,
    Unfortunately, a good proportion of that increase is going on debt interest, NHS and ‘education’ black hole, and ‘dictator welfare’ for Lear jets. We’ve been pumping money into Libya to encourage deals with BP and get the Libyans to stem the immigrant flow (money well spent eh……). Somehow, I can’t see relations improving for a while…..
    Meanwhile, the government is busily making big cuts in non essential government functions like defence and border control……25% staff cut in UK Border Agency

  3. zorro
    Posted March 18, 2011 at 7:29 am | Permalink

    I should have added that we must of course keep benefit spending so everyone can have laptops and flat screen TVs….

    Zorro

  4. zorro
    Posted March 18, 2011 at 7:36 am | Permalink

    I see that David Blair is getting us involved in another war…..can someone please tell the French (our trusted allies) not to sell any weapons to the Libyans whilst the no fly zone is enforced, in order to protect any cardboard cut out soldiers we might send there….

    Thanks
    Zorro

  5. Alte Fritz
    Posted March 18, 2011 at 8:05 am | Permalink

    Your regular readers will be dissappointed that you have overlooked the fact that the vast public sector provides a nice fat cushion for private sector workers to fall back on when they lose their jobs.

    Shocking to overlook this self evident truth.

    • sm
      Posted March 18, 2011 at 11:04 am | Permalink

      At extremely high cost and only if your destitute and it then traps you.It needs simplifying and needs to stop serving itself.

      6 months of JSA before means tests? Council tax/TV Tax/etc (no discount) basically eats the JSA alive. It would be nice to be able to reclaim the real tax paid previously to HMG though.

  6. alan jutson
    Posted March 18, 2011 at 8:28 am | Permalink

    If only the Media would understand the truth of this post, and the implications if we should we not cut government costs and taxes.

    When will the population understand that the government has no money, all government spending is made out of taxation.

    All public wages are paid for out of taxation.

  7. Geoff not Hoon
    Posted March 18, 2011 at 8:29 am | Permalink

    Mr. Redwood, George Osbourne will have all these figures in front of him as he prepares for next weeks budget. Should we hold our breath as to the bold steps he takes to rein in government spending or just assume it is continuing pain for the private sector and private individual as it is in reality after one year of a so called conservative government. My apologies to you but I wont be holding my breath.

    • lola
      Posted March 18, 2011 at 9:53 am | Permalink

      Seconded.

      Heard R4 this a.m. banging on about civil service ‘cuts’. Don’t see the CS as the main enemy at the moment myself. It’s the vast array of unaccountable Quangos that are the first problem that needs culling – now.

      • lifelogic
        Posted March 18, 2011 at 10:18 am | Permalink

        The BBC is the voice of the ever expanding state sector especially radio 4.

        Usual story line “Do you realise that anyone in this country is allowed to
        breath and go to the loo, with no training, no special equipment, no health and safety regulations, no liability insurance or even a licence or any overseeing regulatory authority what so ever – what are you, as minister responsible going to do about this appalling situation?”

  8. Winston Smith
    Posted March 18, 2011 at 9:46 am | Permalink

    Public sector pay increased at a rate 3 times higher than the private sector in the last quarter. The pain is being deferred for 2012 and beyond, probably peaking in 2015. I suspect Osbourne will continue to scale back deficit reduction plans to avoid electoral disaster. This is the result of a highly inflexible 6m strong State labour force, many of whom are on 2 and 3 year pay deals, agreed by the politicians who rely on the income from the Unions. My employer managed to surive the recession because it was able to act quickly on pay cuts and redundancy. The sheer scale, inflexibility and ever rising liability of the public sector is a burden that will stifle development in the UK for generations.

    • lola
      Posted March 18, 2011 at 9:54 am | Permalink

      Seconded

  9. Simon
    Posted March 18, 2011 at 10:13 am | Permalink

    John ,

    Everything you say in your post is true .

    Why did your party make so little noise about the constant overspending whilst in opposition ? Seem to remember Cameron pledging to match Labours spending .

    I read that local authorities were going to lend first time buyers public money so they could put down a higher deposit to get a better loan rate .

    How have the coalition managed to find money for this and don’t you think it will go down badly with those council workers who will lose their jobs ?

    If house prices are too high then please let them fall rather than using our money to try and prop it up at the current ridiculous level .

  10. forthurst
    Posted March 18, 2011 at 12:25 pm | Permalink

    The public sector operates a command economy whilst the private sector attempts to stay afloat with what remains. Karen Buck exemplifies the concept of the command economy in which the laws of economics are suspended for the public sector in favour of the commands of ‘entitlement’, often exemplified by the distance between the average hard-working Englishman in the private sector attempting to support a family, totally unentitled and left to fend for himself once he has been milked of taxes, and her ‘clients’ for whom no provision of human and financial support is too great. There are large swathes of this country which operate almost entirely in the socialist command economy where resources and non-jobs are allocated based upon ‘entitlement’ and a desire for the perpetuation of the status quo.

    There is far more work to be done to ensure that the laws of economics apply equally to the public as to the private sector. Far more needs to be done to control the costs of publicly financed housing and the dissolute and parasitical life styles with which it is frequently accompanied.

  11. acorn
    Posted March 18, 2011 at 12:43 pm | Permalink

    Good article in the ELMR this month:- http://www.statistics.gov.uk/articles/elmr/elmr-mar11.pdf

    “Public and private sector earnings.
    The difference between private and public sector median earnings for full–time employees increased between April 2009 and April 2010. Private sector median gross weekly earnings were £473, up 2.0 per cent from 2009. Public sector earnings were £554, up 3.0 per cent (see Figure 10). Public sector mean gross weekly earnings (£622) were also higher than those of the private sector (£589).”

    The affect of the pay difference is more pronounced at the lower skill levels. The public sector wide union wage scales, suppress the generation of lower and semi skilled jobs in the private sector.

  12. BobE
    Posted March 18, 2011 at 2:47 pm | Permalink

    Always remember that this ConDem government only has 4 years left. They know this and so must act to protect themselves after they are out of office. BP will be very gratefull if it gets its oil contracts functioning again in Lybia.

  13. Johnny Zero
    Posted March 18, 2011 at 6:36 pm | Permalink

    Make no mistake, The 6 Million strong Public Sector and its Unions are about to do economic battle with the Rest os us, which naturally includes the Private Sector. Labour and the Unions plus their huge Public Work Force is determined to cushion the security of their jobs, their salaries and even more important, their “Gold Plated Pensions” at the expense of us all. There is no patriotism nor National Interest in their minds, only self interest and that of their fellow “Workers”. I fear those in the Private Sector, the weak, Savers, the Old are all in for a hard time..

  14. John McEvoy
    Posted March 18, 2011 at 7:31 pm | Permalink

    I heard on Radio 4 some council official objecting to pay cuts on the grounds that he ‘..was not aware of any area in the economy where poor performance could lead to cuts in basic pay’.

    These are the clowns who live off our taxes…..

  15. JimF
    Posted March 18, 2011 at 9:24 pm | Permalink

    We perhaps have the worst possible solution – a government which is taking more tax without completely and obviously flattening the private sector, which would cause a counter-reaction. Meanwhile the public sector continues pretty well untouched, when a radical government would trim it back to a level which meets affordable demand.

  16. REPay
    Posted March 19, 2011 at 12:57 pm | Permalink

    Part of the reason the Tories did not win outright is that they did not criticize the unsustainable levels of spending under Labour. The vaste majority of voter thinks it was bankers, not Brown and Balls to blame. I worked, gratis, after the 2005 election for Central Office and developed an anti-labour narrative based largely on their management of public finances. After the short-termist, tomorrow’s headline PR people got control of the party I was told there was no appetite to address public finances…No wonder the party was seen as opportunist after the crunch. It is incredible that they can be slated for cuts when they have achieved so little. Worst of both worlds…

  17. Lindsay McDougall
    Posted March 19, 2011 at 5:45 pm | Permalink

    I suggest a little megaphone diplomacy to shout these facts from the roof tops at public sector trade union leaders and the BBC. You never know, it might even gain some support from the press and some votes.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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