The route to prosperity lies not in the public sector
Published in: Daily Mail
The Chancellor, George Osborne, will reportedly announce in Wednesday’s Budget an immediate end to national pay bargaining, giving government departments new powers to set localised wage rates.
The response has already been uproar. The aim of this change is merely to rebalance the economy by reducing the distorting effect in some areas of relatively high public sector wages.
Since those areas tend to be the most disadvantaged, however, the trade unions and others on the left have claimed that the Tories are up to their same old tricks in hurting the poor by cutting pay in areas of high unemployment.
A toxic charge indeed for the supposedly kinder, gentler Cameroons. But given the way in which they have so far allowed this issue to be presented, it’s not surprising their opponents are making such hay with it.
The Chancellor wants to end the anomaly by which public sector pay is on average some eight per cent higher than wages in the private sector.
In Wales, this differential jumps to no less than 18 per cent — whereas in the south-east, the public sector pay premium is just 0.5 per cent. These differences have arisen because of the inflexibility of national pay rates, which take no account of differences in local circumstances.
So Mr Osborne wants to open up public sector pay to local variations. But this could mean that millions of public sector workers might have their salaries frozen for years.
Unfortunately, the Treasury has allowed the argument to be presented in terms of what people stand to lose or gain in poor or better-off areas.
As a result, it has inevitably been portrayed as a monumental piece of class spite and injustice.
In vain have Treasury sources emphasised that no current employee will suffer a pay cut. Instead, pay levels will gradually be adjusted to take account of local costs, leading to larger pay rises in the south-east, where the cost of living is so much higher.
Nevertheless, the unions have reacted as expected. An end to national pay bargaining strikes directly at their power and influence — which in itself might be thought to be a cause for national rejoicing.
However, it’s not just the usual suspects in the unions and on the left who are protesting. Some Tories are also sounding the alarm that such a move could spell electoral suicide by provoking fury among public sector workers.
Eric Ollerenshaw, the Tory MP for Lancaster and Fleetwood, has warned for example that the issue could deepen the party’s unpopularity in the north, and that the Government therefore needs to make its case very carefully.
Indeed it should. Instead of talking about the effects on pay packets, it should be presenting this for what it really is — a policy to create more jobs and prosperity in areas where unemployment is high.
For the main reason these areas are depressed is that the private sector is absent from them. Indeed, much of the increase in public sector jobs in recent years has been aimed at masking this fact by keeping people off the unemployment register.
But although some public sector jobs are indeed essential — such as front-line teachers, nurses or police officers — the public sector cannot provide the motor for prosperity because it does not produce wealth. On the contrary, it uses up the country’s wealth.
So there is an urgent need to bring businesses into these areas, to create the jobs that produce prosperity. The problem, however, is that employers cannot afford to recruit staff in these places, owing to the relatively high public sector wages.
So, far from deepening poverty and unemployment in the depressed north or south-west, bringing down public sector pay in such areas would tempt businesses to start providing jobs at competitive rates.
At the same time, public sector pay could rise in the south where, by contrast, the flourishing private sector sucks employees away from hard-pressed public services.
To which critics claim that this would cause a ‘brain drain’ to affluent areas and widen the north-south divide.
This just doesn’t stack up. For a start, the meaningless ‘north-south divide’ ignores the often stark variations in wealth between different parts of the very same city.
And if there is a ‘north-south divide’, it lies as much as anything in the fact that the cost of living in the south is eye-wateringly high.
Surely it is only both fair and sensible for pay scales to take into account the wide variation is the cost of living in different parts of the country? For if people aren’t paid enough to live in the expensive south, they won’t work there. Which is why the public sector in the south is struggling.
The destructive effect of these distortions is borne out by research. One such study published last year pointed out that areas in the north where the cost of living was far lower than in the south still didn’t attract private sector investment because national public sector pay rates siphoned off the supply of suitably qualified employees.
This made it much harder to create new businesses, particularly in places where those recently made redundant, the long-term unemployed, the less skilled and the school leavers were to be found.
In other words, entirely contrary to what the unions would have us believe, national pay bargaining means fewer jobs in the places where they are needed the most.
Yet critics of the Government’s proposed change in policy behave as if market forces don’t exist, and as if the only thing that matters is that low-paid people should have their living standards insulated from any downturn at all.
Such economic illiteracy is actually a formula for keeping such people permanently low-paid or unemployed in areas that are systemically impoverished or even dying on their feet.
Indeed — in some cases this is literally true. Another research study published two years ago produced the startling finding that where private sector wages were ten per cent higher than in the public sector, death rates for heart attack victims admitted to hospital emergency departments were seven per cent higher.
According to the authors, this was because in places where standardised public sector pay rates could not compete with the private sector, it was difficult for NHS hospitals to attract and retain skilled workers — and this led to lower-quality services. Deregulating wages, said the authors, would lead to higher-quality public services and fewer deaths.
As in local areas, so it is too with the national picture. The way to get the British economy as a whole out of trouble is to shrink the unproductive public sector —where so many jobs aren’t front-line services at all but constitute layers of unnecessary bureaucracy — and grow the job-creating, wealth-producing private sector.
The problem, however, is that the public sector has become a kind of national addictive drug. It dulls the pain of economic decline — but in doing so it stifles enterprise, dynamism and wealth creation.
And it has also created an ever-expanding population dependent on the state and vulnerable to government control — a captive class of permanent left-wing voters.
The country can’t seem to be persuaded to break this addiction. As a consequence, the political risks of taking on this enormous vested interest are very great.
Mr Osborne needs to take his courage in his hands — but he also needs to shift the discussion from pay rates to the jobs and prosperity that his sensible reform would achieve.