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.