Three big myths about public sector cost-cutting

By Andrew Wileman
April 13, 2010

Wileman- Andrew Wileman is a independent business consultant and writer, most recently writing about cost management in the private and public sectors in “Driving Down Cost” (Brealey Publishing). The opinions expressed are his own. –

“We only need to cut cost because of the credit-crunch crisis.”

No, there is a deep structural problem that was there before the crunch. The public sector has been driving up its share of GDP for decades, in the UK, the U.S. and almost all advanced western economies. Its momentum will be painful to slow down, let alone reverse. This underlying trend was concealed in the nineties and noughties (when the talk was of “the end of big government”) by a debt-bubble-fuelled growth in the private sector. In the UK, we are already over a 50 percent state share of GDP.

In the U.S., post-Obamacare, the state’s share of GDP, already at 45 percent, could also rise to over 50 percent in the next decade. An American Rip Van Winkle from the 1950s waking up to a 50 percent state economy would think the U.S. had lost the cold war and become a Russian satellite.

“To do serious cuts in government services we will need to accept a major deterioration in the level and quality of front-line service delivery.”

This assumes that we cannot find ways to make front-line workers more productive and we cannot find ways to cut excessive overhead cost. Any private sector business that made the same assumption would go out of business in ten years. Of course we should be targeting productivity gains of more than 2 percent a year, and we should be trying to reduce overhead cost by more than 2 percent a year.

“We can fix the cost problem without really confronting the serious over-compensation of public sector workers”
No politician or civil servant dare speak this truth – nor do they want to, as this cost problem includes their own pay.

Public sector pay, which represents more than 40 percent of government spending, has escalated to such an extent that there is now a gaping chasm of unfairness and disadvantage between the 6 million in the UK who work for the government and most of the 24 million who work in the private sector and pay the salaries of the 6 million.

Public sector pay packages, including final salary pensions which add 30 to 40 percent to their cost, are now 50 percent higher than equivalents in the private sector. This gap increased by 5 percent in 2009 alone, in the deepest recession since the 30s – private sector pay declined by 1 percent and public sector pay went up more than 4 percent.

Edward Leigh recently stepped down from nine years as chairman of the Public Accounts Committee spending watchdog, and said: “There is not a shadow of a doubt that you can deliver the reduction in the deficit that we require by imposing massive efficiency savings and job cuts in the bureaucracy.” He attacked the soaring state payroll, calling the “massive” pay rises in local government “the worst scandal of all”.

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