Public Sector Draining The Life Out of The Economy

 

The annual average regular earnings growth was 6.3% for the public sector but just 2.9% for the private sector. 

UK gilts this morning: 10-years hovering around 5.4%, 30-years just shy of 6%. 

This is not sustainable! 

Public Sector Is Killing The Private Sector

 

Private sector pay up 2.8% public sector up 6.1%.

This is of course unsustainable, the public sector is killing the private sector that funds it! 

Regular wage growth in the three months to June 2026 was 3.5% excluding bonuses, up on the previous period.

Including bonuses the rate was 4.1%, down from the previous period.

Read the release ➡ https://t.co/8FKHMf2iHI pic.twitter.com/FyDXTJyGTT

— Office for National Statistics (ONS) (@ONS) August 18, 2026

ONS UK labour market data from August 2026, where unemployment held steady at 4.9% instead of dropping to the expected 4.8%.

Julian Jessop, at the Institute of Economic Affairs, described the latest jobs figures as “dire”.  

He said: “The unemployment rate remains stubbornly high, with a big jump in the single month figure for June.”

Irony Klaxon - Public Sector Pensions

One side-effect of restoring the triple lock is that 5m retired public sector workers will get a 10% increase in their pension payments next April. For 2.8m members of the biggest scheme, that means a £1,000 pay rise. On top of the near-£1,000 increase in the full state pension

— Philip Aldrick (@PhilAldrick) June 23, 2022

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Bust

Lord Hutton's proposals that public sector workers should be stripped of their final salary pensions and have schemes linked to average earnings, while paying more and working longer have unsurprisingly touched a raw nerve with the unions.

The GMB have warned of co-ordinated strike action.

Bringing the country to a halt will achieve nothing. Like it or not the country is broke (we have a debt of £4.8 Trillion), we cannot continue to pay ourselves salaries with money that we do not have.

These reforms have been needed for many years, it is only to be hoped that they are enacted and that they are not too late.

The Country's Debt Burden

As the country faces cuts in government expenditure that are, "apparently", swingeing and ruthless it is worth putting a number of issues into context:

1 The overall debt burden of the country is a staggering £4.8 Trillion.

2 The cuts are cuts in planned inflationary increases in government expenditure, not cuts in actual amounts being spent.

3 The deficit in the Local Government Pension Scheme in England has more than doubled in the past three years to £100BN (7% of the UK's annual economic output).

Despite whatever the politicians might claim, the "cuts" when taken into context are but a pin prick in the backside of the shocking level of debt burden that is crippling the country.

As regards the pension black hole, the solution that the politicians will force on us is going to be increased taxes and increased contributions from members.

Neither of the above solutions will be popular, and will be delayed thus exacerbating the problem. The correct solution should be to change the pensions provided to the public sector to that of defined contribution (as per many in the private sector).

The SOBER Decade

Welcome to the "SOBER Decade", as George Osborne announces a £83BN spendings cut package that will (according to the much publicised photo of the Treasury briefing document) cost 490,000 public sector jobs by 2014/15.

Savings
Orderly
Budgets
Equitable
Rebalancing

Some leaders of the private sector claim that it can absorb the unemployed fleeing from the public sector. A tad optimistic to my view, given that many in the public sector have zero experience of working in the private sector and that there is considerable "prejudice" within the private sector to those from the public sector.

As ever there will be a chasm of reality between economic "plans" and political reality.

The next decade may well be "sober", but will the patient survive the withdrawal symptoms?

Lah Lah Land

The Chartered Institute of Personnel and Development have conducted a survey of a sample of people who work in the public sector.

Forty nine percent of those sampled agreed with the statement "workers have to do what's necessary to protect their jobs and if that disrupts public services, that's the price of living in a democratic society".

Quite how going on strike will actually protect their jobs and current terms/conditions of employment eludes me. Like it or not, the country cannot afford the current level of debt bequeathed to it by the previous administration.

Work Longer, Contribute More

Lord Hutton has published an initial recommendation from his ongoing review of final salary public sector pension schemes.

Simply put, public sector employees should work longer and contribute more to their pension schemes (thus taking the burden from the private sector). Lord Hutton wants the final schemes to be changed to a career average basis.

The unions are already "reacting" in a totally expected manner to this recommendation; ie they don't like it.

Lord Hutton's final report will be published before the 2011 Budget.

Beware The Hype of The Double Dipper

There are fears, being stoked by the media, that Britain may be heading for a double dip recession.

The service sector, that accounts for the bulk of Britain's economic output, showed that its growth fell to its slowest since the end of the recession last year.

The blame is being laid at the feet of the government, for cancelling public sector contracts.

All very well, but the size of the public sector debt and the fact that certain service sector companies were milking the government for every penny that they could get over many years is reason enough for the government to call a halt to the free for all.

The reality is that the UK has relied for far too long on the public sector to prop up the economy.

Economies cannot survive forever by merely passing one bundle of money from one part of the economy to the other, money must be earned from productive industries and services that sell outside the economy.

Recession Worse Than Thought

The ever "reliable" Office of National Statistics (ONS) has issued revised data for the UK economy for Q1 2010.

The revised data shows a decline in output of 6.4%, compared with the original data that showed a 6.2% decline in output.

However, the ONS has left its earlier estimate for Q1 growth of 0.3% unchanged.

The bad news is that the "growth" was on the back of a revised increased in government consumption of 1.5%, rather than the original increase estimate of 0.5%.

Quite what use these statistics, and indeed the ONS, are to anyone given that they are subject to regular revision and that they are after the event eludes me.

Level Playing Field

The government has announced that it will switch the index linking of private sector final salary pension schemes from the Retail Price Index (RPI) to the consumer price index (CPI).

This is in line with the similar measure announced in last month's emergency Budget relating to public sector pensions.

CPI excludes house prices and mortgage payments, is consistently lower than RPI. It is estimated that private pension incomes will fall between 10%-25% in retirement.

The CBI is pressing for legislation to allow those schemes who are specifically required to use RPI to be able to use CPI.

Public Sector Pensions

Trouble is brewing in the public sector, the Institute of Directors (IOD) and the Institute of Economic Affairs (IEA) have (via a joint commission) called for a radical overhaul of public sector pensions in addition to the pay freeze that is to be implemented by the government for all but the lower paid.

As a starting point they have called for a 2% increase in contributions from public sector employees.

The commission also wants other major changes, as they argue that the true value of the main unfunded public service pension schemes is over 40%, yet the combined value of employer and employee contributions is approximately 20%.

Needless to say the unions representing the public sector do not buy into this argument. They point out that the pay levels of the majority of the public sector is so low, that the pension is the "reward" for accepting low levels of pay.

All very well, maybe, if the country can actually afford the cost.

Cuts

The Chancellor, George Osborne, is using zero based budgeting to reset the country's battered finances.

He has ordered a purge of capital spending, and review of every single capital expenditure project, to run alongside the annual expenditure cuts demanded of every department of between 25% and 40%.

It is likely that the 40% target is being used as an exercise to "scare the chickens" into grudgingly rolling over and accepting 25% cuts.

There Are Bad Times Just Around The Corner II

David Cameron has warned that the cuts that the government envisages making are going to be deep and painful, and that they will dramatically affect the way that we live our lives.

The Tories have quite rightly blamed Labour for the mess, and are shrewdly using this mess as an opportunity to push forward their social/political agenda (eg revisions to benefits and pensions).

Tomorrow George Osborne will announce a "once-in-a-generation" revolution that will involve a public consultation exercise on what people expect from public services, and where they think the cuts should fall.

Public Sector Pensions

With a general election looming the CBI have entered the political fray and, quite correctly, pointed out that someone really needs to do something about public sector pensions.

The CBI state that the public sector final salary pension schemes (a burden of around £1 Trillion) are unsustainable and must be overhauled.

The CBI state that public sector pension benefits are now worth an average of 26% of annual salary, this is far beyond the norm in the private sector.

The CBI wants the next government to set up an independent commission to fully investigate pension costs.

All very well.

However, the politicians have a vested interest in retaining the current system, as when they retire they receive a public sector pension.

The Big Freeze

As if the long and snow bound winter has not been enough, Gordon Brown (keen to show that he can make decisions) has decreed that another freeze is on its way.

This time it relates to a £3BN public sector pay freeze on the pay of top civil servants, judges, generals and doctors.

He seems to have forgotten that he is no longer Chancellor, and that the "privilege" of setting public sector budgets rest with the Chancellor.

Given the fact that Brown and his acolytes have bankrupted the country, £3BN is but a drop in the ocean

Were he really serious about saving public money, he would impose a heavy does of reality on councils and other members of the public sector who have defined benefit (final salary) pension schemes. The private sector has long since recognised that these are unsupportable.

However, Brown knows that he employs at least 5% of the electorate; to upset them before the election would be political folly.

Whoever wins the election will of course need to address the issue of public sector pensions, the pain will come later.

Life Is Taxing

The Times reports that small businesses spent longer doing their taxes in 2008 than in 2007, despite Labour's promise to reduce red tape.

Small and medium-sized businesses in Britain spent on average an extra five hours working on their taxes, mainly because of the temporary cut in VAT in December last year. The total number of hours spent filling in tax returns rose to a record average of 110, up from 105 in September, according to a report by the World Bank and PricewaterhouseCoopers.

Britain slipped from 24th to 25th in the rankings of 183 countries for the least number of hours spent on taxes.

Will the government ease the administrative and tax burden?

No!

The increase in the PSBR means that the government will in fact increase taxes. Unfortunately, given that we are in the middle of a recession, this increase will only make matters worse.

A Mountain of Debt

Brown's Bankrupt Britain has a nasty habit these days of breaking records, not the good ones but the bad ones relating to the size of debt.

Sure enough, as is becoming the norm, another record has been broken. In October the UK Government had to borrow £11.4BN. This is the worst monthly figure since records began in 1946.

Tax receipts fell by £4.1BN, compared with October 2008, and spending increased by £4.5BN.

The total public sector net debt now stands at a staggering £829.7BN (59% of GDP).

Certainly the figures are not good, most certainly if the government does not come up with a credible plan to show how it will rein in the debt external and internal confidence in the UK will evaporate; the situation will become far worse, as Sterling will collapse and high achievers/businesses will uproot and leave the country.

However, the ability of the current government to set up a credible plan is limited by a number of factors:

1 Time, an election has to be held by May 2010.

2 Gordon Brown will need to play to the gallery of public opinion in order to try to win the election, any plan that sets out tax rises and spending cuts will not be aviable to fight an election on (in Gordon Brown's eyes).

3 Gordon Brown doesn't have a credible plan.

Reality Bites

The government and councils are finally waking up to the burden that they have imposed on the taxpayer, wrt the burgeoning public sector and its defined benefit pension schemes.

It seems that millions of public sector workers will face having their pensions reduced, as politicians battle to save the public sector from financial meltdown and avoid a middle class tax revolt.

The Times reports that John Denham, the Communities Secretary, is drawing up plans to downsize the public sector pensions which face a shortfall of at least £60BN.

The Department for Communities and Local Government, keen to avoid a winter of strife, have said that it would ensure that council pensions were fair, solvent and affordable.

The reality is that whatever the promises made, the current level of pension benefits for the public sector is unsustainable and cuts will be made.

The public sector workers will not react well to the cuts, and the country will be in for a very rocky ride as the industrial action taken will doubtless mirror that of the dying days of the last Labour government in 1979.

Funny how history repeats itself!

Unemployment Up

Following on from yesterday's inflation figures, that showed a fall, the unemployment figures published today show an unexpectedly large rise of 281K to 2.38M.

The level of unemployment is expected to peak next year at around 3M, as the government's cuts in the public sector start to bite.