Austerity Comes to Britain

December 2nd, 2011 at 12:44 am David Frum | 39 Comments |

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Dagenham is an industrial suburb east of London, hard-hit by the decline of manufacturing in the United Kingdom. It was the site of tonight’s Question Time program on BBC, where I occupied a chair hoping that I wouldn’t get asked too many questions about the British educational system.

Question Time is staged in shifting venues across the United Kingdom in front of a studio audience, presumably representative of local opinion.

The issue dividing opinion most intensely is of course yesterday’s one-day strike by public-sector workers -and the underlying issue of reform of public sector pay and pensions.

As best an outsider can tell, the issue is really two issues:

1) The UK public sector is better paid on average than the UK private sector–about 7.5% on average is the most cited figure. Pensions and retirement benefits are especially generous–and are outrunning the ability of the government to pay without forcing cuts elsewhere or else calling for rapidly rising taxes.

2) One crucial reason for the disparity: private sector pay has declined since the slump of 2008, and public sector pay has not (yet) followed it down. Britain was hit hard by the crash of 2008-2009 and has posted an even more feeble recovery than the United States.

The two issues thus unite fiscal and moral questions–not only how benefits commitments are to be financed, but also whether the public sector should be protected from the pain suffered by the private sector. British public sector unionists make a claim that would seem recklessly audacious to their American counterparts. They suggest that the public sector should provide a model for the private sector, act even as kind of a leading edge of the British labor market. It’s possible that the recent Labour government inwardly accepted this view.

Labour supported a large expansion of public sector employment, up 16% between 2000 and 2010.

But the real clue to what was going on comes when you disaggregate that 16% figure by region. In the 2000s, Britain benefited from a financial services boom headquartered in south and east Britain. For the rest of the country, however, the Tony Blair years were not times of prosperity. In those regions, the heartland of the Labour party, the Tony Blair-Gordon Brown governments substituted public-sector employment for private sector job creation.

During the finance-led prosperity boom of the last decade, the previous Labour government helped recovery and regeneration in the older industrial regions of North of England, Scotland and Wales, in part by re-distributing tax revenues from London and the Greater South East, in the form of increased levels of public sector employment. As a result, in many of these localities, net job creation has largely been state-sponsored, with private sector activity also, to some degree, dependent on public sector contracts. Accordingly, many parts of the country have become strongly reliant on redistributed state funds and thus will be hugely vulnerable to any planned cuts.

In parts of the North East, for example, close to half of all employment is in the public services sector. …. Tyne and Wear, Merseyside and Humberside are all highly dependent on the state as a significant source of employment.

Now the reckoning has come.

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39 Comments so far ↓

  • Bingham

    Retire. And. Move. To. Brazil. Now.

    Here’s a video of your future for the next 30 years. Enjoy.

    http://www.youtube.com/watch?v=4z9f9Eybv4I

    • mannie

      I will confess I dident watch the video, but if you are serious in suggesting that the emerging markets are the place to be, I couldent agree more. I have spent the last 20 years making my fortune in those “emerging markets”, and the feeling of being in nations that are in the accendency is a very satisfying one.

      • Rational Plan

        Britain and America are not the same, Government spending is now about 50% of GDP, our taxes and spending are higher than Germany’s, unfortunately we don’t get German level of public services. The simple problem is the previous government got drunk on all the taxes it was raking in during the financial and real estate boom. During this entire period if the Labour party really believed in Keynesian economics it should have been running a surplus instead it was running a deficit. Government spending since 2001 has increased at almost 7% a year.

        Traditionally public sector workers were paid less than private sector workers, but in the trade off almost no one got fired, pensions were secure and often generous. Sick pay is generous and slackly enforced (curiously employee absenteeism in the public sector was much higher).

        The problem Labour came to power promising to spend money on Public services and rescue them from evil Tory underfunding, increases in spending was going to be followed up rigorous reform etc. Well can guess what happened public sector pay rocketed, generous deals that promised increased productivity did not deliver. The most infamous was the Deal struck with GP’s it was hailed as transformative blah blah blah, designed to deliver more out of hours working etc.

        What happened was it was so generous that GP doubled in less than 4 years while they effectively stopped out of hours GP visits. As the pay is so high for this care many out of hours work is now provided by European Doctors who fly in for the weekend and provide emergency cover. this proved embarrassing after a few high profile deaths of patients being treated by Doctors who did not speak English and were strung out from working 72 hours non stop. Tale after tale can be dug up with little effort.

        Another problem is that the Unions have managed to keep national pay bargaining. In the UK all government jobs are paid the same were ever you are in country. It has many pernicious effects. One result is that Government services are poor in London and the South East. Private sector pay here is higher and so are house prices. The best teachers and nurses may start their training in the South East, but many transfer to the regions were the loss of London weighting is more than made up by much lower house prices. You can have high standard of living on public sector pay in the provinces. The other consequence of this that public sector pay outside of the South East is much much higher than what the private sector can afford, so they don’t get the best candidates. The result in that many regions of the UK are dominated by the state.

        It has been said for many decades that the main and simplest reform to make government services to Work in the UK would be abolish National Pay bargaining. The problem of course is that they could not afford to increase wages in the South East by 25% to 40% without corresponding cuts elsewhere and politically we all know that losers shout the loudest.

        The hue and cry about these devastating cuts no doubt seems very important to those involved but is nothing to the cuts that are happening in Europe. Government spending is forecast to continue to rise in cash terms, once you factor in inflation the cuts amount to 0.6% of government spending.

        Hmm, meant to reply to the reply below.

        • ottovbvs

          A bit of a ragbag of symptoms rather than the malady. While doctors pay may have been a bit of a management screw up it’s not a fundamental factor in British economic management. The British economy looks much more like the US economy than does the German one, private and public debt levels are similar. the structure of the economy, the size of the financial sector, and so forth. I said it was the one that looked “most like ours” not that it was “the same.” Notably Germany hasn’t de-industrialised to the extent that Britain or the US has. Manufacturing in Britain and the US is around 11% of GDP while in Germany it’s twice that! Taxes are higher than in the US but the level of public services the British receive while maybe not as good as Germany are infinitely greater than in the US.

  • bamboozer

    Really David? All this animosity and none for the Bankers, Politicians and Corporations that have treated Britain as badly as in America? Forgiving people , those Brits. But I notice the sign said “Restore Publice Services”, not get those rotty bastards working for the government. Thier anger is coming here, as usual Americans are slow to realize whats going on until it comes to thier door. But it will.

  • ottovbvs

    This is a bit of an oversimplification but there’s some truth in it. Simply put the Brits allowed the financial industry to become too large a part of the economy. Some of the blame for this certainly accrues to the Blair government who did little to reverse the shift and much to encourage it. However, this process was already well advanced by the time Blair took office and had really been going on since the massive de-industrialisation of the Thatcher years. Not all her policies were bad like curtailing the power of the unions but her govt dramatically reduced the size of Britain’s manufacturing base and started the shift to financial services. In far too many cases the village was destroyed in the process of saving it. The process was not very different from what’s happened here but at a more accelerated pace and it’s almost certainly true that the British economy is the one in Europe that looks most like ours (it’s not entirely coincidental that after us the UK has the worst income inequalities in the developed world). Since much of the manufacturing base was concentrated outside the south of England and half the country lives there the govt (and this includes both the Thatcher and Major governments who preceded Blair) had to create job openings or face the prospect of mass unemployment across everywhere outside the south. The original sin lies in allowing the manufacturing economy to collapse. To take arguably the most notorious case of village destruction the coal mining industry. Prior to the great battles of the 70′s and 80′s the coal mining industry employed several hundred thousand people and supported entire regional economies in the midlands and north of England, Wales and Scotland. Now I don’t think there’s a single deep shaft coal mine left operating in the country.

    • Frumplestiltskin

      yeah, Thatcher had too much faith in the creation part of creative destruction. The Chinese learned enough from that failure to keep propping up their many SOEs.

  • nhthinker

    Private sector workers have had to compete with global labor and became willing to accept much less based on global realities. The politicians had protected the public sector workers based on debt and unsustainable future commitments. Private sector workers are getting jealous of their public sector counterparts.

    The left tries the misdirection- Turn your jealousy to the few very rich and ignore that government workers are taking care of themselves to a level that is NOT globally competitive. Thus, you end up with Greeks and California public life guards retiring at 50 with pensions at 80% of salary.

    The numbers aren’t adding up, but hating on the rich will allow the public employees and the older generations a little longer to sock away entitlements that are not earned as sovereign debt reaches precarious proportions and the Ponzi scheme comes crashing down on itself.

    • dante

      How much of the disparity is due to the fact that most public-sector work *can’t* be outsourced? Manufacturing can be shipped overseas, forcing factory workers to compete globally with lower-wage earners. Someone like a bus driver *can’t* be outsourced to cheaper labor, and neither can school teachers, firefighters, police, etc. That allows those workers to avoid having to compete with cheaper labor…

    • armstp

      There is absolutely nothing wrong with paying public sector workers more than private sector workers. However, I am not sure that is really the case.

      Great, if the government pays more, then they will get better employees.

      To actually measure whether anyone is paid more or less you would have to measure compensation versus productivity. Just saying a public sector bus driver gets paid more than a private sector bus driver means nothing. How many miles does the bus driver drive? How much revenue does the bus driver bring in? What is the safety record of the bus driver? etc.

  • ottovbvs

    “and the Ponzi scheme comes crashing down on itself.”

    The thinker delivers himself of another insightful pronouncement. Btw thinker since you’re so concerned about my blogging practices I thought I’d keep you up to date on those sites where I’ve been “run off”….in this case it was because I think plaid trousers vulgar.

    http://www.ivy-style.com/

    • nhthinker

      Half a trillion a year of continuous trade imbalance puts the US on the path to receivership. More consumption per American does not make problem any smaller.

      As to otto’s need to contribute to ivy-style.com, it only reinforces the mental picture of the quintessential limousine liberal that his internet persona exudes. Not to mention the tone-deaf boorishness that gets him kicked out of forums.

      • ottovbvs

        “it only reinforces the mental picture of the quintessential limousine liberal that his internet persona exudes.”

        Yeah…I got kicked off this one for refusing to join the Nazi party but you might find the link useful thinker.

        http://www.stormfront.org/forum/blogs/

      • nhthinker

        The limousine liberal concedes the argument by invoking Nazis. What a loser. Go drown your loss at the bar at your yacht club.

        • ottovbvs

          “The limousine liberal concedes the argument ”

          What argument thinker?…I’m just telling you the sites I got kicked off since it’s very important to you apparently…. I got the boot here because I wasn’t enough of an old woman….You should have no problems.

          http://tealoverscorner.ning.com/profiles/blogs/victorian-dance-cards

        • nhthinker

          Otto’s gone off the deep end or maybe just had a few too many at the yacht club. I suppose he will continue to litter this thread with his inane web sites and his dishonesty of whether he was actually registered at those sites or not.

          Clearly, my point of his getting kickoff, or his running away from (not really sure what it was), the HuffPost was relevant on the thread he was being overly impolite on.

          But on this thread, he has been bested- the Nazi reference was an obvious concession to flip the pieces off the board and yet he still continues with even more inane and dishonesty commentary. Ooh well, I guess we just need to smile and ignore his imaginary wit.
          :)

        • ottovbvs

          Thinker, since you’re betraying ever increasing signs of class hatred (what have you got against sailors for godsake?), this blog might which I got kicked off for not wanting to emigrate to North Korea might be of interest to you…

          http://cpusa.org/

        • nhthinker

          I have absolutely nothing against typical sailors…
          Do you really want to claim you are a typical middle-class sailor whose house is comparable to Warren Buffet’s versus a limousine liberal that made his money in real estate and then got out at inflated prices and stuck others with the crash and living high on the hog?


          Comment by Ottovbvs — January 24, 2011 @ 12:31 pm

          l’ve oftern thought about buying one but basically you need to be tall AND bulky to wear it with style. I’m tall but slender and they always appear to drown one. For me it’s the Covert or a tan cashmere Chesterfield.

          —–
          Do you dislike me characterizing you as a limousine liberal? Any particular reason why?

  • Ogemaniac

    “The UK public sector is better paid on average than the UK private sector–about 7.5% on average is the most cited figure”

    Does this this figure account for education, or is like some of the numbers conservatives toss about in the US, which fail to account for the fact that the proportion of degreed government employees is about twice that found in the private sector? I personally know a couple dozen people working for the federal government. Half of them have PhDs or MDs. All those remaining have masters, except one who only has a BA. Of course people like this are going to earn more than the norm.

    • Rational Plan

      I don’t know about the US, but the State sector is huge, it is mostly filled with non university educated people. The biggest expansion in the UK state in the last decade has been at the lower end. So now schools are filled with teaching assistants, in addition to the teacher. Those people you see patrolling the town centres are probably not Policeman (UK police pretty much gave up Police patrols in the 70′s as it was not efficient, they prefer to stay in cars), they will be community support officers and they will fine people for littering etc. The police don’t bother themselves with such things anymore. Hence people often complain of police taking several days to come to site of a burglary or robbery at a local store.

      • ottovbvs

        Is it substantially more huge than the British peer group in Europe….Germany, France, Italy….I doubt. You don’t actually present any facts, it’s popourri of prejudices and urban myths.

        • Rational Plan

          Well since the previous Government expanded employment in the state sector by over a million people, how many of them do you really think are armed with PHD’s . You don’t need that many University professors or that many Doctors, what people like are frontline services, so we get Teaching assistants and community support officers, jobs that did not exist 15 years ago. Teachers used to teach one to a class but now it requires a team, yet our international rankings seemed to have plummeted. Police numbers have never been higher but apparently we need community support officers to patrol our streets as it wastes police time. In fact there are loads of new jobs and services that have been invented or new benefits that have been created. They all have to paid for and the boom is over.

          We did not have massive tax cuts and increase in pork barrel spending like you have in the States, we had tax increases and even bigger increases in public spending.

          The Conservatives argued that this was wrong, that it was storing up trouble, but no one listened they were just being those nasty Tories, so they gave in and started talking about sharing the proceeds of growth and talking about what they would spend the money on instead. Until the crash and they junked their promises of big increases in spending than the government of the time.

          There are plenty of studies about public sector pay being higher than the private sector in many parts of the country. It’s just over the country as a whole it this has tended to even out with areas that it was the opposite. Over the last ten years government spending as a percentage of GDP has increased from 37% to 50% it would be remarkable if all that increase had not shown up in wages. People should not get to caught up with comparing the US and the UK. Britons often think they are culturally closer to the US than mainland Europe. After all it’s of the Anglosphere views on Australia and Canada often get mixed up here. But the apocryphal saying goes “People think we are similar to Americans, until they actually go there, and realise that, actually they are Europeans”. Tories in the UK is still a broad church. Many emotionally feel that they should be attached politically to the Republicans, but often that is just getting nostalgic for Maggie and Ronnie. A good chunk of the Tory party would consider themselves a blue dog democrats if they crossed the atlantic. Though really it does quite fit, you all seem so weirdly religious. For the conservatives in the UK Europe and our relationship to it is their cornerstone. While conservatives have tended to be more conservative on cultural issues than Labour, historically once it realised that the country has changed, it changed itself to match it. We look across the Atlantic and see the din and quietly shudder. One main avenue of attack for the Left in this country is suggest that Conservatives are pro american, or have links to various nut job groups in the States, that they are Neo Cons in disguise.

        • ottovbvs

          “Well since the previous Government expanded employment in the state sector by over a million people, how many of them do you really think are armed with PHD’s .”

          Why don’t you answer the question…is the UK public sector appreciably larger than that in Germany, France or Italy?….rather than replying with this sort of gibberish. If you read my original comment you’ll see that I said the previous government expanded the public sector. As you’ll see from this chart…

          http://articles.businessinsider.com/2011-11-28/markets/30449203_1_guess-public-sector-government-sector

          …the actual figures for % of govt employed workers is as follows:

          UK 20%
          Italy 29%
          Germany 31%
          France 35%

  • armstp

    Austerity at a time of economic malise is completely moronic! Makes no sense whatsoever.

  • zaybu

    Again, trying to portray this as a Right versus Left misses the point. Norway, one of the most “socialist ” country in Europe and perhaps in the world, has an unemployment of 3.6% (2010 est.), debt at 49.7%. Compare that to the the US ( 9%, 100%).

    Their budget is

    revenues: $233.5 billion
    expenditures: $184.5 billion (2010 est.)

    Yep, that’s in the black. The recession of 2008 was a small blip on the radar.

    It doesn’t matter what program you have, as long as people are willing to pay through their taxes and keep the debt load very low in term of GDP, the country will do fine.

    Another fact to keep in mind: Norway’s tax, 56.3% of GDP; USA 14.7% of GDP. They don’t shy from high taxes.

    • ottovbvs

      Compare that to the the US ( 9%, 100%).

      8.6%! which is about where British unemployment is. And Norway isn’t really a very good comparable for various reasons (notably abundant natural resources notably energy relative to population size) although I don’t disagree with your fundamental point about high tax levels not being incompatible with low unemployment. Germany or Sweden are probably better benchmarks. In fact in European terms the Brit and the German models of economic management and industrial policy really are the great ying and yang of alternative approaches.

      • zaybu

        The 8.6% is not really reliable as a good indicator of what’s happening presently to the economy for two reasons: 1) 120,000 jobs were added in November but 315,000 people are no longer seeking employment; 2) this is the Christmas period and every year there is a bump in new hiring. A better reading of the economy will come in February when the January numbers are going to be out.

        I agree that Norway is not what the USA can emulate, but the point is that as long as a country puts its house in financial order, then it will be in a better position to handle the ups and downs of the economic cycle of bust and boom. The US has increased its debt since WW2, except for a tiny brief period under Clinton. Other countries, like Norway and Canada for instance, who have maintained a low GDP percentage debt were able to weather the 2008 recession far better than the US. And that can only come about with judicial government spendings and revenues. The day that the sacredness of tax cuts is debunked in the US, it will be the day that the country is going to be on its way to a better sound financial basis.

        • ottovbvs

          The 8.6% is not really reliable as a good indicator of what’s happening presently to the economy for two reasons”

          You used the 9% which was the official figure until this morning. Now you’re trying to move the goalposts. The number of people actually seeking employment changes every month. If the 8.6% figure was incorrect so was your 9%!

        • zaybu

          I should have thanked you for reading the papers this morning and correct me on the 9%. OTOH, you didn’t miss the opportunity to seize on this occasion showing what a jerk you are. Priceless.

        • ottovbvs

          “OTOH, you didn’t miss the opportunity to seize on this occasion showing what a jerk you are.”

          OTOH you demonstrated as usual just how childish and insecure you are whenever anyone points out that you are a little off the mark. I wasn’t in the least rude or disprespectful towards you and actually said I agreed your basic point. But you have respond with name calling. You need to grow up.

      • smajor

        Norway has natural resources- so do we. We also have one of the world’s greatest innovation engines and amazing agricultural production. These are all resources, and we have them in spades. A major difference between us that wasn’t pointed out- our regulatory framework.

        We can certainly compare ourselves to Norway and I think we ought to, because we might see how all of this red-scare nonsense is driving our country bankrupt. Countries with higher tax rates, stronger safety nets, and tighter regulations are doing better, all else equal.

        • ottovbvs

          “We can certainly compare ourselves to Norway”

          Sure we can. We can also compare ourselves with Singapore or the Maldives. It’s just an utterly meaningless comparison because the differences of scale, ethnic diversity and various other factors between us and Norway are far greater than the similarities.

  • jorae

    While the emergency response from the Federal Reserve prevented financial collapse, the Federal Reserve shouldn’t have allowed conditions to get to that point, says Joshua Rosner, a banking analyst with Graham Fisher & Co. in New York who predicted problems from lax mortgage underwriting as far back as 2001.

    The Federal Reserve, the primary supervisor for large financial companies, should have been more vigilant as the housing bubble formed, and the scale of its lending shows the “supervision of the banks prior to the crisis was far worse than we had imagined,” Rosner says

    Starting in August 2007, the independent Federal Reserve created a variety of ways to bolster the financial system with cash or easily traded securities.

    By the end of 2008, the central bank had established or expanded 11 lending facilities catering to banks, securities firms and corporations that couldn’t get short-term loans from their usual sources.

    By Sept 2008 the US Government was involved with TARP

    “New York-based Morgan Stanley (MS), took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages.”

    Since the bank was able to profit from this exchange and essentially write off this debt any money they make from the home owners is pure profit…Plus receiving FDIC money from an already established ‘resuce’

    ”””””

    The cost of borrowing for so-called ….too-big-to-fail banks… is lower than that of smaller firms because lenders believe the government won’t let them go under..

    The perceived safety net creates what economists call moral hazard — the belief that bankers will take greater risks because they’ll enjoy any profits while shifting losses to taxpayers.

    Shift the losses to the taxpayer…Isn’t that what decreased benefits are? Less money coming in due to a collapsed economy, is less money to pay for government works. The more I get to know the Bush Administration, the more I think it was all intentional.

  • smajor

    Please, David, if you are going to talk about the difference in private sector vs public sector pay, provide some reference for your numbers. People love to talk about the pay difference without ever controlling for things like education, job type, etc. I would hope that police officers, military personnel, defense analysts, and scientists (lots of those on the govt payroll) get paid at an above-average rate. Also, since wage declines have been felt less by higher educated workers, it’s hard to say, without proper analysis, how much differences in the composition of public and private labor forces account for differences in pay changes.

    As for laying off public sector workers and cutting their benefits, we’ve seen what Austerity has done for Great Britain so far- do we really need keep going with it? The logic seems to be “since other people are suffering and we’ve done nothing to help them, we ought to throw you lot under the bus as well.” Brilliant.

    • Rational Plan

      Except the UK’ defence and police are a tiny part of UK state spending. For 2012. Pensions will take up the largest portion of government spending at £129.3 billion, then healthcare at £123.8 billion, Welfare at £111 billion, Education £93.3 billion the Defence following at £47.2 billion. These are all vast agencies, the idea that they are stuffed full of highly skilled workers with university degrees is wrong. Also I don’t know where you get the idea that the military pays well. When state spending approaches 50% of GDP, it does matter whether the state sector is more highly paid. Please remember Britain is not the United States. Your own budget proposes much steeper cuts than Britain is trying.

      Total spending is due to rise from £703 billion to £731 billion in 2013, how is this austerity. it’s nothing compared to real cuts other european countries are making. Everyone is screaming because they have been used to rapid increases in spending for the last 10 years.

      • ottovbvs

        “These are all vast agencies, the idea that they are stuffed full of highly skilled workers with university degrees is wrong.”

        Strawman. As far as I can see no one has suggested these agencies are stuffed full of workers with university degrees. I certainly haven’t.