Why can’t the UK government get its deficit down? This issue has been exercising commentators recently, in the light of the latest assessment from the Office for Budget Responsibility (OBR) that George Osborne will once again miss his target for the deficit in the 2014-15 financial year.
Of course, the size of the deficit has fallen – from the £157bn bequeathed by Labour in 2009-10, to £108bn in 2013-14. But it hasn’t fallen by as much as the OBR consistently predicted, or as much as the chancellor would like it to. This limits the ability of government to deliver tax cuts in advance of the general election next year.
A common, and plausible, reason is that there has been a shift in how the economy operates. Output has recovered strongly, but earnings have not. The bargaining power of employers is stronger, many members of the workforce have a more flexible attitude to how much they work, so take-home pay has failed to keep up with inflation. As a result, the amount of tax flowing into the government’s coffers is not as much as would be expected on the basis of evidence from previous economic recoveries.
But the fundamental reason for our stubborn deficit is that remuneration in the public sector remains too high. The recent strikes by Unite and other unions show that many people on the conventional Left seem to believe that the purpose of public expenditure is to boost the private consumption of those employed in the public sector.
The continued existence of annual increments in much of the public sector has no counterpart in the private sector. In the latter, pay increases have to be earned. In the former, they are automatic for many workers.
An argument used to justify the pay gap between the public and private sectors is that the level of qualifications of public sector workers is, on average, higher. This is entirely spurious. What counts is not what goes into the production process of an organisation, but what comes out at the end. Countries in the former Soviet bloc, especially the eastern European satellite states, had high levels of educational attainment. But the quality of much of what they produced was very low.
The Trabant, for example, was a very popular car made in East Germany. But once trade with the West opened up, its value fell to effectively zero.
Gordon Brown started off well as chancellor. He kept us out of the euro and kept a grip on public spending. But he began to have delusions in the early 2000s that he had solved the problems of boom and bust, and could do anything.
He started to stuff money into the pockets of Labour’s core vote in the public sector. The result was that a structural deficit emerged in the UK’s public finances even before the crisis of 2008 struck. Any chancellor who is serious about both fairness and eliminating the deficit needs to make serious reductions in public sector pay and pension entitlements.