Author: johnredwood

Yesterday’s strikes passed without huge passion or support. The Labour party did not come out for the strikers. Union leaders were split over the wisdom of the strikes. Most newspapers wrote mildly in support of the government’s approach to public sector pensions.

Some public sector employees feel strongly that their pensions should not be altered. They should understand that the government has promised to honour all  pledges made to date – there will be no attempt to take away pension entitlement already earned. The pensions issue has created a divide in the country between public and private.

A couple of decades ago the defence of the more generous index linked public pension was simple. Public sector employees on average earned less than  their private sector neighbours. They were given a better relative deal in retirement as some compensation. The funded public sector schemes were capable of paying the future pensions.

The last twenty years have seen three hugely important changes. The first was the rapid increase in public sector pay, leading to the average public sector worker now earning a little bit more than the average private sector employee. The second has been the big increase in longevity, as better diets, lifestyles and health care have enabled many more to live in to their 80s and 90s. The private sector, once the home of the final salary pension plan, was hit badly by the taxes imposed on pension plans in the 1990s, and by the poor investment returns of the noughties. Companies have in the main closed their funds to new members, many to new accruals. A significant number of funds have been closed down altogether.

As a result we now have pensions apartheid in this country. Many in the private sector think it most unfair they have to pay more tax on their lower earnings to pay for generous pension schemes in the public sector that they cannot enjoy. Some wanted the new government to do to public pensions what has been done to private sector pensions. They wanted the funds closed to new members, and maybe to new accrual as well.

Instead, the government has gone for a more moderate approach which will still leave the public sector with more generous pensions than the private. The government is proposing that indexation be switched from RPI to CPI, that the age of retirement be delayed and that public sector employees contribute more themselves for their pension provision. The details of the changes are up for negotiation.

The country cannot afford to pay for a large number of public employees to retire at 60, or even at 65, on final salary pensions indexed to the RPI. The outgoing Labour government admitted that, and a former Labour Cabinet Minister has prepared the Report on pension changes that the government is using as its text for the deal on offer.

Something has to give. If anything  governments have been   slow to raise the retirement age in line with rising expectations of longevity.The total pension liabilities of the UK state are bigger than the national debt, and do need controlling.

The  government must not concede or lose the argument about affordability. On BBC figures there will be an increase of £2.4 billion a year in the taxpayer cost of public pensions between this year and 2015-16. That means each family having to pay around £500 a year more tax to meet the bill. The accumulated capital cost of the unfunded schemes and the deficits on the funded ones now amounts to a debt of around £20,000 for every man, woman and child in the country. There has to be some limit. Let us hope both sides negotiate about what that limit should be, and then agree the best way of hitting that target with least damage to the future benefits of public sector pension recipients.

It was bound to be Ed, as this site has said throughout the contest. I send him congratulations on his victory.

The task ahead is to answer some of the country’s questions about what went wrong in the last five years. Why, for example, did Labour’s very own system for regulating banks and other financial institutions get it so wrong, allowing such growth of risk and credit up to 2007? Why did they then get it wrong the other way, forcing such a tough pace of contraction that even Northern Rock, their favourite bank, got into difficulty? Why did they commit such huge sums of taxpayers money to rescue by buying shares and underwriting, when a more sensible money policy and lender of last resort actions coupled with sales of assets would have been a cheaper way of avoiding deposit losses for taxpayers?

They also need to answer how they managed to spend so much in the public sector, and borrow so much, without obtaining the big improvements in public services people wanted? How did they preside over 5 million people out of work and on benefit even at the height of the boom? Why did all the spending and borrowing fail to keep the economy going as they promised?

The test for Mr Miliband is whether he is indeed Red Ed, keen just to argue for more public spending and borrowing come what may, or whether he will develop a reform agenda. Will he recognise that the Labour model went wrong? That many voters want something different and better? That Labour needs to have a message for people of enterprise and for savers as well?

It will be interesting to watch how it develops. I expect Mr Miliband to seek to move back from the left now he has won the leadership. The government should not underestimate him. He is a modern politician who has risen without trace and has put little of his views on the record. It will get more competitive from here – only Mr Balls has shown much aggression so far from the Opposition benches, making it easier for Ministers.

There’s been a lot of noise for some years about the high cost of public sector pensions. The last government talked a little about it, but tried to ignore it. Indeed, most of their actions led to a large surge in the overall costs, as they added to the public sector payrolls, put the pay up, and finally presided over a surge in UK inflation. BY the time they left office the unfunded liability of public sector pensions was over £1 trillion, or more than the stated public sector debt.

The public sector overall gets better pensions treatment than the private sector. There the ravages of inflation, poor investment returns and greater longevity of pensioners combined with Mr Brown’s tax attack and regulatory strictures to close most final salary schemes or lead to cuts in future benefits in the ones that survived. The more the last government regulated the funds, the fewer stayed open or survived. The funds were literally taxed and regulated to death.

Within the public sector there are very different terms and conditions. At one end of the spectrum lie the contributory schemes with employees paying a sum each month creating a fund to pay the bills – like the MPs scheme. At the other extreme are the pension plans like the civil service one where there have been no funds put aside and no contributions.

The Public Sector Pensions Commission has recently reported on this topic. They claim that the government will pay £18 billion in 2010-11 for pensions, when it should be putting aside £35 billion if all the pensions were properly funded. The huge gap between public and private is summed up in two figures. In 2008 94% of the public sector employees were members of a final salary pension scheme, compared to just 11% in the private sector. The normal pension age in the public sector outside local governemnt is 60 and in the private sector 65.

The Review offers nine different ways of closing the gap – a flexible menu from which a suitable set of policies can be drawn. They are:

1. Higher employee contributions
2. Later age of retirement
3.Lower accrual rate – so people have to contribute more over their lifetime
4.Using a career average salary for the final pension
5.Salary ceiling
6.Lower index linking of pensions in payment
7.Ending the contracting out lower rate of National Insurance
8.Switch to funded defined contribution, ending the final salary promise – people get the value of what they save
9.Notional defined contribution

Different people will have different views of how they would like to see reform. As a future beneficiary of the MPs scheme I prefer 1 and 2 – a full contribution rate to cover the cost coupled with a higher age of retirement. As long as the extra burden is removed from the taxpayer there is much to be said for fashioning flexible choices for public sector employees to gain the maximum consent to changes that will be far from popular with many of them.

On the Today programme this morning we debated the impact of public spending changes on the construction industry.
I argued that according to the Office of Budget Responsibility – and most private sector forecasts – overall investment in the economy is forecast to increase every year to 2015 from next year. Business investment will rise substantially, investment in housing somewhat, whilst public capital investment will fall until 2013 and then will start to rise again. The total figures are:

Investment
2009 – 14.9%
2010 -0.5%
2011 +3.9%
2012 +7.9%
2013 +8.8%
2014 +8.0%
2015 +6.9%

Total growth in investment 2010-15 40%
Total growth in investment 2009-15 19%

I am glad to say the others accepted that total investment is likely to go up over the next few years. They concentrated on falling capital expenditure in the public sector. The BBC’s Economics correspondent said that public capital investment was going to fall from £38.9 billion in 2010-11 to a low of £19.9 billion in 2013-14, before starting to rise again.

I said the departmental captial spending limits showed capital spending at £51.6 billion this year, falling to a low of £37 billion in 2013-14 before rising again. I could have used the gross public sector investment figures, which show spending of £59.5 billion this year, down to £43.3 billilon in 2013-14, before rising again.

The difference is important. The BBC figures are net of depreciation. In other words they take away from the amount spent an estimate of the losses on exisiting buildings and equipment from wear and tear and old age. This is not a cash item. It is an entirely notional figure. Their figures do incidentally show that despite the cuts the stock of government capital continues to rise.

The correct figures to use to assess construction output are the gross figures. This is the amount of money the public sector spends on capital spending, raised from taxs or borrowings. It is spent on new buildings and equipment.

The government needs to change its rhetoric about public sector cuts. It should not allow Labour the space to campaign against “deep and damaging” cuts by giving any credence to the idea that public spending is being cut by 25% or some such fictional figure. There will be hotheads in the Labour movement who wish to move on from falsely vilifying Tories for seeking and liking spending cuts, to organising protests and strikes against the cuts in particular services. When public spending overall is going to continue to rise in cash terms that would be needless and stupid.

Good management does not seek confrontation with Unions or workforce. Good management understands that leadership is about persuasion, carrying your workforce with you for the changes you need to put through. It is always best to demonstrate why necessary change for the organisation you lead is in the interests of the staff as well as the customers or taxpayers. The government should say they have approved cash increases for every year of this Parliament overall but the settlement is tighter than previous years. In order to serve the public well it will require new ways of doing things and much better cost control. Management wishes to work with staff to see how this can best be delivered. Be open minded about how you do it, but single minded about doing it.

Here Mr Clegg could play an important role from his central position in the Cabinet Office, the hub of the British civil service. The Liberal Democrats have good lines of communication with public service employees and a membership base oriented towards services paid for out of tax revenue. He could make a speech setting out a vision of streamlined and more effective public service, where improvements in quality and productivity go hand in hand with better employee management. The government is putting together the ingredients of such a strategy. They include:

1. A stated intention to use staff freezes to cut the number of back office and overhead posts as people leave, avoiding compulsory redundancies whereever possible
2. A pay freeze for two years to reduce the need for service cuts, ameliorated by pay rises for the lowest paid.
3. A willingness to ask the employees how they would suggest hitting the new tigher budgets, involving staff in the evolution of their own service.
4. A preparedness to consider new models of service delivery, inviting employee buy- outs, contracting out to former staff and other solutions
5. A new rigour over purchasing costs to cut the cost of bought in items
6. Cancelllation of heavy reliance on consultants and temporary labour

These methods of cost reduction mean that the core staff of the public sector gets a much better deal than private sector staff did in many companies forced into rapid cost reductions to survive in the recession. The government can say to its staff that they will have chances of accelerated promotion in a world where little external recuritment is allowed. Their jobs will become more interesting as the role of the external consultant is rolled back. The emphasis will be on adopting new methods to ensure better quality and service delivery , making up for the msising decade when productivity stood still in many parts of the public sector.

Management should show quiet determination to get more for less. It could start by tightening up on absence from work, and by turning down many more requests for temporary labour and consultancy assistance to do tasks. Management should talk softly, seek cooperative working to drive change, but leave staff in no doubt one way or another we do have to do a lot more for less. There is no need to have strikes. Strikes are not a sign of successful machismo, but unfortunate diversions from the task of improvement. If managements end up with one they have to win it, but it’s better not to go there in the first place.

There are two sensible answers to the Euro crisis. Greece could leave the Euro, devalue its currency, and come to an accommodation with the markets over what it needs to do to enable it to borrow again. That would be the best answer for the Euro, and would enable Greece to take part of the cuts in its living standards through devaluation, as the UK is under its own version of an unsuccessful economic policy based on too much state borrowing. Alternatively, Greece could cut its public spending more substantially, until the markets believe it can then afford the debt it needs and already has.

Instead, the governments debate two dangerous answers. They take seriously the idea that Greece should fail to make payments on its debt – a form of government theft from the savers who have in the past supported Greece and believed its promises. They discuss lending Greece more money on easy terms, based on the absurd idea that the way to sober a drunkard is to give them another drink.

I find it suprising that so many governments, Euro commentators and so called experts expected the Euro scheme to work when they put several economies into it that had not come into line with the performance and costs of the core countries. I and a few others warned strongly about the dangers of the debt and the starting exchange rates when we made the case against the UK establishment, arguing that the UK should never enter such a scheme. In “Just say No: 100 arguments against the Euro” I pointed out the destabilising effects of the countries having different levels of debt and different levels of new borrowing. I said “Controlling budget deficits is central to this task” of creating a decent currency. It was quite obvious that for the scheme to work member states had to surrender domestic budgetary control to the EU, to avoid free riding on average interest rates or to avoid Greek style disasters. Indeed, in the founding paperwork of the Euro it was spelt out that member states had to keep their stock of debt to 60% of GDP and their extra borrowing each year to no more than 3%. The decision to allow relaxation of these necessary rules has led directly to the Greek crisis.

It was also clear that a country had to bring its private sector costs into line with the zone as a whole as well as control its state deficit. “If you cannot devalue your currency when your costs are too high, you have to sack people and close factories” – exactly what has happened to the olive belt economies.

It does no-one any favours to imply there is a quick fix, or to suggest lending Greece billions this year will solve the problem. The underlying problem is fundamental. The Euro can only work and be a decent currency if there is in effect one state budget for the Euro area. Germany needs to reinforce the rules over how individual members do borrow, not grant an easy loan and watch as Greece still fails to sort out her borrowing habit.

Promoted by Christine Hill on behalf of John Redwood, both of 30 Rose Street Wokingham RG40 1XU