Tuesday, 14 April 2009

The Public Sector Time Bomb

I can wax lyrical on the recent revelations on MP Expenses which I firmly believe are just the thin edge of the wedge. There are over 600 MPs in the main House alone who are running personal and departmental expense budgets larger than the total budgets of a great proportion of Britain's raft of small businesses, who are currently struggling so hard to survive this recession.

But that really isn't the half of it - by a long, long chalk. This recession has crippled British business and the private sector has taken almost the entire brunt of it. This week, Teachers will be the next sector to demand a 10% pay increase and they are getting peaky already over other issues like Sats for 7 year olds - if they can strike for that, then surely striking for pay is a short hop. Meanwhile out in the Neverland of council workers, The Tax Payers Alliance revealed this week that many Council chiefs received pay rises of above 10% last year, while over 1,022 public servants earn in excess of £100,000, a number which swelled by 27% in a single year, and 16 of these people now earn above £200,000 a year - a salary that not even Gordon Brown enjoys.

We can get uptight about these figures indeed - the inefficiency of public sector organisations is just stupid - and it isn't just salary bills. Many public sector organisations, the total of which now account for 1 in every 4 jobs in the UK, employ a raft of contractors through 'outsourced' contracts for certain work rather than directly employ them plus many new infrastructure investments like the NHS database have an enormous number of external 'consultants' swarming over uncontrolled and spiralling projects. You would then start shuddering at the rise in the number of politicians we directly fund in the new tiers of Government from European Parliament and the Commissioners down to Assemblies and Councils and other related bodies we just don't think about.

Sharing The Pain

Largely all those jobs have continued as normal with just a few minor cuts here and there. As the burden of Unemployment increases on the Welfare System due to the raft of workers laid off from private firms, and the ever-increasing sums being pumped into our sorry financial system, the Budget Deficit is rising alarmingly, much faster than anyone thought from Government to research institutes. About the only place that got it right was the IMF who all along said this was going to hit Britain harder and for longer than most other places.

It is easy to see why when such an enormous proportion of Government spending goes on keeping politicians and civil servants in jobs. But these are not just any jobs. These jobs have the most lucrative pension schemes outside of Fred Goodwin's. A 10% rise in salary in one year for Council executives earning so much has a truly massive effect of the requirement to fund the same people's future pension dues.

In the recently published accounts of the NHS alone, the pension deficit is currently running at £212 billion.

The whole Public Sector pension requirement is a ticking Time bomb of nuclear proportions and it is not included in any of our borrowing requirements today. But you can be very certain of one thing, we will have to pay for it.

Pension Hurt

I am one of the vast number of people in the UK who regularly saves a significant proportion of my earnings, while my employer also contributes. However, my current outlook on any future pension is looking as dreadful as our general economic position. But it is actually far worse. As one of the private sector workers, I will be paying disproportionately more of my money to fund not just the salary increases of the Public Sector but the vast rift between what the Government has set aside for pensions and what is needed to pay them. It means that my future earnings will be far less in order to pay for this and I don't think much of that has been factored into the current gloomy talk about public finances, national borrowing and future tax liabilities.

The Institute of Fiscal Studies (IFS) paints a very gloomy picture about the rise in the budget deficit after the release of lower tax revenues and higher bail outs. Adding it all up, the IFS reckons that UK debt will be 77% of GDP by 2013.

The Time Bomb

While we talk of ever increasing amounts of spending, at some point the whole issue of public finances has to be sorted out and right across the board. Right now, we have too many jobs in too many places in the public sector which are just superfluous. We have too many uncontrolled contracts with third party firms which are sumps for money with no visible results. We have, across the board, a pension and benefits scheme for public workers which is wholly out of kilter with the private sector (with few exceptions depending on your position) and we have a private sector that will be called on in ever greater amounts to pay for this.

We are developing a 'Ruling Class' of bureaucrats akin to the latter day Soviet Union which makes sure those who are employed by the state are more protected in terms of job security, money, expenses, pension and the law than the rest of society who are at the grunt end of generating the GDP. The similarity is beginning to grate on me - privileged jobs with spanking benefits and allowances, international travel for fact finds, expense fiddling goes unpunished and peers who transgress the law are treated better than everyone else.

The picture of modern day Britain is far from the 'Cool Britannia' we were promised unless you are employed by the State.

The Green Shoots

The Centre for Economic and Business Research (CEBR) tells us that the VAT cuts have actually boosted our economy with over £2.1 billion of increased sales since 1 December 2008. It argues that the 2.5% cut which is due to expire in January 2010 should be extended for 6 months. The CEBR argues that annual growth in retail sales was higher than expected and this can only be attributed to the VAT decrease.

If, like me, you have consciously reviewed your finances and selectively decreased your spend then the rise comes as a bit of a shock. As a small businessman, I can certainly say that the VAT decrease has no effect on my sales at all while I have cut back on unessential purchases. I would expect in the business-to-business sector this is exclusively the case - VAT is just a money collection service on behalf of the Government for small businesses, in fact due to companies extending payment terms unilaterally, I have had to fund VAT payments through the business cashflow in the last quarter - it has actually cost me more.

The CEBR findings don't seem to fit the observations of most who are experiencing this recession, unless those who are losing their jobs are actually spending more.

Of course, such effects may be short lived. The Government plan was to actually raise VAT to 20% and it has an upper window of 25% allowable by the European Union. Will they use the full scale of charging for the future?

Well someone has to pay for all those public service expense accounts and pensions. As anyone would tell you in the Private Sector, there is no such thing as a free lunch.

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