We must unleash the private sector

Allister Heath
IF you want to know why the looming cutbacks to the public sector will be so painful, look no further than what is happening to wage bills. It is extraordinary that at a time when savings are desperately needed, state sector wages are still growing much faster than those in the private sector.

In the year to July, total pay growth in the private sector stood at 1.2 per cent, compared with 2.7 per cent in the public sector. This makes no sense: a pay freeze in the public sector would allow tens of thousands of jobs to be saved. What matters is the total wage bill, the number of staff multiplied by all of their costs – and the fact that this is still going up means that job-cutting will have to be even harsher.

State jobs are starting to go down but not yet by much. Public sector employment peaked at 6.097m – on the official payroll, omitting contractors, agency workers, GPs, freelancers and others who are state sector employees in all but name – in the fourth quarter of last year. The subsequent two quarters have seen declines; the number now stands at 6.051m.

So far, the private sector has easily compensated for this: yesterday’s figures from the Office for National Statistics show a huge jump in private employment. Despite the small cuts in the state sector, total jobs increased at the fastest quarterly rate since May 1989, when the economy was in an other unsustainable bubble. Private jobs increased by 308,000 (1.4 per cent), a very healthy number, on the face of it at least. This easily compensated for the 22,000 (or 0.4 per cent) drop in public sector employment.

The main caveat is that the quarterly increase in employment was mainly driven by part-time workers, which increased by 166,000 on the quarter to reach 7.93m, the highest figure on record. However, full-time workers increased by 121,000 on the quarter to reach 21.23m, not a bad result. Part-time workers now account for 27.2 per cent of total employment.

In the second quarter of 2010, the public sector accounted for 20.8 per cent of total employment in the United Kingdom, down from 21.0 per cent in the first quarter (these figures probably underestimate the real reach of the public sector by around three percentage points or so).

Those who claim that there is no way that the private sector can create jobs to replace the 600,000 or so that will probably be lost in the public sector over the next five years are too pessimistic. It will be tough but it is perfectly possible (and in fact likely). The economy will probably grow by just 1.7 per cent this year yet we will finish the year with more full-time private jobs than we started it.

But that’s hardly a great result. We need much greater private sector job creation than we are likely to get. The problem is not that the public sector is being cut (that is essential to avoid national bankruptcy). The problem is that the private sector is too weak, too burdened by ever more costly rules and costs. Shrinking the state will liberate some resources for the private sector; but what we also need is an ambitious supply-side, pro-entrepreneur programme of marginal tax cuts, deregulation and vigorous welfare reform to jolt the private sector and labour market out of their stupor. The private sector needs an injection of fresh capitalist energy to perform to its true potential. Let us hope somebody is listening in Downing Street.