My three Big Problems with New Labour’s Britain – its nannynagging Police State, its increase in red tape, and public sector bloat – became even sharper when I ran a few numbers about just how under-delivering our public sector is.
For centuries, we who create wealth (business and taxpayers) had a deal with civil servants: work diligently for a living wage, and we’ll forget about your immense job security and gold-plated pension arrangements. New Labour broke that agreement: Britain’s public servants are now among the world’s best-paid – now earning more than an equivalent private sector role.
(Some senior civil servants are on record as thinking they should be paid as much as a FTSE-100 CEO, simply because the same number of people work for them.)
At income parity, that means it takes three private sector workers to support one public sector worker. (There are about 20m private sector workers in the UK and over six million public sector workers, an 800K increase under Blair and Brown.)
So far, just about sustainable – over three privates for one public. But let’s think about this for a second.
All of the civil servants get paid directly from the public purse – i.e. from the taxes of others. Meaning they contribute nothing to the Exchequer at all. So the ’employers contribution’ of NI taxes, for public servants, means nothing – it’s just making these people 11% more expensive. So a public servant has to be 11% more productive just to justify his job.
But there’s more. Public servants enjoy final-salary pensions – something very rare in the private sector. (And even where they exist, they’re subject to risks, like the providing company going bankrupt, that don’t exist in the public sector.) So a public sector pension, even compared to a final salary private one, is massively more advantageous – a discount factor of zero.
Now, a man retiring today spends on average a decade in retirement, and often much more. With a final salary pension, say a third of his total lifetime costs are taken up by his pension. But public sector pensions can often be passed on to spouses – and women marry younger and live longer, about 7-9 years’ difference on average. So overall his lifetime costs will be about twice as high as a private sector worker, who have to contribute to (and live within) their own pensions.
But wait. Public sector workers retire younger – often very much younger. (Why? Because they can.) 55 is common; 50 is not rare. And for certain sectors – like policemen – it’s normal to then take second jobs, again in the public sector, without forgoing the pension from the first. That effect is small but significant – let’s say 10%. A public servant now has to be 2.1 times as effective as a private sector worker to be worth the money. (Unrealistic to say the least.)
However, we’ve not yet dialed in the difference in salary it’d take to bring private sector pensions up to high public sector standards. A reasonably senior civil servant – say, someone equivalent to me but in the public sector, perhaps leading a small team and handling a local departmental budget by his late 30s or early 40s – gets a rock-solid, gilt-edged final salary pension equivalent to a pot of over £1m on the day he retires.
To get the same, I have to contribute approximately £3000 a month to much riskier private schemes from age 30 or so to have a reasonable chance of the same outcome – not far off having to earn another salary on top of my own.
To normalise this data, we’ve got to increase the civil servant’s costs again, to about 2.9 or so. A public sector worker has to be almost three times as productive as a private sector worker to add equivalent value.
On top of this we’ve got to apply a discount factor, because of the increased risk a market-based pension carries. (Bad times are not balanced out by good times in the world of corporate pensions – companies prefer to take ‘contribution holidays’ when the funds are growing strongly, without the necessity of catching up when growth slows.) Let’s say 15% or so discounted to the present day. Not far off a quarter million pounds, so we have to add that quarter mil to the public servant’s costs to be consistent. Another 10% or so on total lifetime costs. 3x.
So in Britain today, a public servant costs three times as much as a private sector one.
With taxes at a third of income, that means it takes nine private sector workers to employ just one in public sector.
And in Britain today there are a lot of public servants.
(All this, of course, is without mentioning the source of those funds. In the private sector, workers are paid from profits made; public servants are paid directly from state coffers and make no contribution in tax themselves. They’re wealth consumers, not wealth creators.)
Look in the dictionary under “unsustainable” and there’s a photo of Gordon Brown.