Sunday, October 26, 2003
Halting the state job machine
Posted by David Smith at 04:00 PM
Category: David Smith's other articles

One of the biggest and most visible changes in Britain in recent years has been in the public-sector jobs market. Working for the government used to be a trade off between security (plus a good pension) and a low salary. To some it may even have been a labour of duty, if not love.

That is changing. The pension advantages of public-sector employment remain, indeed they look much better after the problems suffered by company schemes. But the salary disadvantages have become much smaller.

Jobs that pay more than 100,000 for senior public-sector managers are now commonplace, and a few jobs paying double that amount are appearing, despite John Prescott's call for the salaries of public servants to be kept below the prime minister's 175,000-a-year package.

The new head of the Audit Commission will be on a 200,000 package, as will the new chief executive of Bradford council, if they can find one. Across the board, the public sector is making up for past pay squeezes. The latest figures show average earnings in the public sector rising by 5.6%, almost double the private-sector rate of 2.9%.

Rising pay is matched by rising numbers. In an environment where the public sector is cutting back, as used to be the case, holding down wages is easy. But when the government is bidding aggressively for new staff, as it is now, salaries are bound to rise.

Haymarket, Lord Heseltine's publishing group, is making money out of this jobs boom. "I've come round to the view that the public sector isn't as bad as all that," says the former Tory deputy prime minister.

Cabinet office figures, just published, show that civil service numbers have risen by more than 11%, to 542,770, from their recent low point four years ago, and by nearly 27,000 in the past year. The big Whitehall employers are the Department of Work and Pensions, with 137,680 staff, the Ministry of Defence and its agencies, with 93,450 and, under Gordon Brown's wing, the Inland Revenue with 82,840. Customs and Excise has nearly 23,000, the prison service more than 44,000.

This, of course, is only a fraction of all public-sector staff. The Ministry of Defence has more than 90,000 people to administer armed forces totalling 209,000. The Department of Health is quite lean, with 4,620 staff, but the
National Health Service employs more than 1m. One guide to overall public-sector numbers is provided by the numbers employed in public administration, education and health, up by 750,000 to 7.15m in just five years.

Not all those extra jobs are in the public sector, some being in private health and education. We can, however, say for sure that the increase has been dominated by the public sector. It is also certainly the case that, coming at a time when the private sector has been reining back, without it there would have been a sharp rise in unemployment. The rise in these mainly public-sector jobs almost exactly mirrors a 700,000 drop in manufacturing employment over the
same period.

Britain's unemployment rate is lower for the first time in living memory than in any other member of the Group of Seven (America, Japan, Germany, France, Italy and Canada). Without the boom in public-sector jobs, the claimant count, currently 3.1%, would probably have risen to 5% or more; the wider Labour Force Survey jobless measure, 5%, would be nearer 7%.

All this looks like the product of brilliant economic planning. Public-sector jobs came on stream just as the private sector was reining back, a perfect example of counter-cyclical economic policy. If the late Lord Keynes is up there, he will have been smiling down benignly on Gordon Brown.

Except, of course, that none of this was intended. This Labour government decided to clamp down on public spending when it took office in order to avoid the mistakes of its predecessors, who had spent first and asked questions later. The later spending relaxation, after a two-to-three year squeeze, was not predicated on a slowdown in the economy. Indeed, had the chancellor known the economy was going to slow he would surely have been less generous.

So public-sector jobs have boomed, and this now creates a potential problem. The private sector also appears to have come through the worst and is recruiting again, even in hard-hit areas like IT and financial services. Are we going to see public and private sectors competing for workers in a way that pushes up wages? Will the public sector's jobs drive "crowd out" the private sector's expansion hopes?

Fortunately not, it seems, for public-sector jobs are not going to boom for much longer. The public-spending famine of Labour's early years was followed by a mighty feast. But the Treasury now appears determined to put departments back on a diet - not so much Atkins as bread and water.

All these things are relative, of course. Health stands as a mighty cuckoo in the spending nest, with guaranteed real-terms increases of more than 7% a year until nearly the end of the decade. But other departments face much smaller increases or real cuts.

Not only that but there is mild alarm at the top of government about how the public sector has translated spending increases so readily into extra staff. Extra frontline staff were one thing, an explosion in administrators, back-office staff and, yes, silly politically-correct posts, quite another.

A Treasury-inspired review by Peter Gershon, head of the Office of Government Commerce, is looking to cut the amount spent on administration, with the aim of diverting more to frontline services. Another, by Sir Michael Lyons, will examine cuts in civil service posts alongside the transfer of some of them outside London.

None of this necessarily means the public sector is about to see large-scale job reductions. It does mean the great expansion of the past few years is coming to an end. And that will be just at the time, if things are going to work out serendipitously again, when private-sector employment is picking up.

PS: Without wishing to add to Iain Duncan Smith's woes, I think I may
have spotted his problem. The Tory leader, particularly when riled, bears an uncanny resemblance to C. Montgomery Burns, Homer Simpson's evil boss.

On a more serious note, I have to return to the Bank of England and interest rates, after the monetary policy committee voted earlier this month by 5-4 to leave base rate unchanged at 3.5%.

A 5-4 vote one month does not guarantee a rate rise the next. In its six-year history the MPC has been at 5-4 before, only to pull back from raising rates. The five who voted to leave rates unchanged this month wanted to give growth a chance by not risking choking off the improvement in business conditions. They were also less concerned than the others about the impact of recent big data revisions by the Office for National Statistics.

Even so, this may be a case where even these members decide that, having set up expectations of a rate rise, there is no point in prolonging the agony. Mervyn King, the governor, has said, in effect, that it is a question of when, not if, they go up.

Assuming they do raise rates next month, however, the Bank should also roll out its familiar "stitch in time" justification for doing so. By acting now the MPC will be hoping to nip in the bud strongly rising household debt, and the newly resurgent housing market. A rise in the cost of borrowing may not feel very nice, in other words, but even nasty-tasting medicine can be good for us.

From The Sunday Times, October 26 2003