Three big myths about public sector cost-cutting

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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So if we cut public sector pay by 20% we would reduce the deficit by 8% i.e. down to around 3-4%. When someone next says cutting the deficit means cutting public services the answer is no. We can maintain services, but cut public sector pay instead. I will vote for the first politician prepared to reveal this uncomfortable truth.

Posted by Hamish Grant | Report as abusive

In the 1970’s when Harold Wilson was waging a war on what he saw as Civil Service waste and over-manning, there was a very pointed cartoon in the Daily Telegraph (or Times).

It showed a senior pin-striped civil servant addressing a similarly dressed less-senior civil servant. The quote was “Jenkins – I need a report first thing in the morning on how many extra staff we will need to implement these economies”!

Things don’t seem to have changed a lot.

Posted by Roger M | Report as abusive

Presumably it should read “We can’t fix the cost problem…” not “We can…”?

Posted by J Cooper | Report as abusive

What a bizarrely ignorant notion that bureaucracy can be ‘cut’.
For those of you out of touch with the last 25 years of economic and archaeological theories of cultural development, the very basic notion of ‘diminishing return on investment’ precludes complex Western societies from cutting back on bureaucracy. You cannot ‘decomplex’ a developing system, the idea is intellectually idiotic, sufficient only for the more gullible voters.

Posted by Rhoops | Report as abusive

Great article – certainly opens the gates to comments.
To the previous post by Rhoops: You attempt to baffle readers with your academic inspired pontifications in order to denounce possible popping of the Civil Service Bubble. It doesn’t wash with me.
I have worked in Government offices and observed that 50% of the staff are enjoying the ‘career ride’ paid for by the taxes of the private sector. I have seen the games Civil Servants play, they are fully aware of their perks, and will try all sorts of tactics to avoid facing the harsh reality that people in the private sector face every day. The fact that they vote (in politicians) to maintain their privileged (less)work-(more)life balance is part of the problem.
Solution: Let the UK run out of money, then everyone will sit up straight.

Posted by Simon Drake | Report as abusive

At last somebody is quoting what everyone in the private sector knows. The public sector is the drain on Britains place in the world. They are overpaid underworked and over rewarded. When we are told that we need to pay these ridiculous salaries to keep the best talent, what a load of rubbish, We pay more tax each year and receive less service back for it. When Government say how much our standards have gone up, why doesn’t someone say just compare our rate of improvement to the rest of the world? Look at the rest of Europe and look how their standard of living has improved, it isn’t many years ago that Spain still had non tarmac’d roads and horses, donkeys and mules pulling the carts, now look at the,their hospitals and services are far better than ours, we have rubbish collection every 2 weeks they have theirs daily, the same applies all over the world. From being in the top bracket of economies and standards of living we our now in third world territory just look at the state of our roads. We pay more tax than anyone in the Western world, we have now devalued our currency by 30% plus, sold all the family treasures for peanuts. Come on Britain wake up to what we have been led into in the last 13 years.

Posted by MAlcolm | Report as abusive

Here are some FACTS,from the site ts/mythbusters/index.aspx#
The average annual pension paid to a retired Civil Servant last year was £6,700. Anyone joining the Civil Service since July 2007 has not been entitled to a final salary pension. Instead, they receive a pension based on how much they earned throughout their entire career. The average annual salary in the Civil Service is £22,850. This is based on full-time civil servants as at 31 March 2009. This salary is £2,120 less than the national average for the private sector, which was £24,970 in April 2009.

Posted by Alison Bell | Report as abusive

Simon Drake above declares that:
“To the previous post by Rhoops: You attempt to baffle readers with your academic inspired pontifications in order to denounce possible popping of the Civil Service Bubble. It doesn’t wash with me.”
I’m afraid your own ignorance of contemporary knowledge has baffled you entirely here. I have nothing but contempt for the vulturine practises of the upper middle class bureaucrats that run this country. That does not mean I have to myopically reject those longterm socio-economic effects which underly complex Western societies. Complexity does not evolve simpler systems: therefore we are stuck with a process of increasing sophistication in economy and social structures, on top of which is sat this more readily apparent (to you) increasing ‘bloated’ bureaucracy. If you cannot understand the underlying principle here of ‘complexity’ as it applies to culture and economics, then the fundamentals of this issue are outside your vision I’m afraid. Moaning about effects from processes you don’t understand, is a mug’s game. Fortunately by staggering coincidence, the same political class that benefits from expanding bureaucracy, is merrily giving all you whiners a lovely election soon where you may vent your spleen to your hearts content. Pause and reflect though whether your vote is actually for your preferred ‘party’ or merely a contrived method to have the gullible masses legitimize their own duping once again.

Posted by Rhoops | Report as abusive