PLEDGES to cut red tape are a sure-fire indicator of a politician bereft of ideas and in deep trouble. Likewise pledges of ‘fundamental reform’ or ‘improving public sector productivity’. Our Chancellor Mr Hunt can make all the promises he wants, but words and speeches won’t fix our bloated, unproductive and unaffordable government machine.
As the chart below from Statistica shows, the public sector workforce size has been growing as fast since 2018 as it did under New Labour and Stalinist Brown. I haven’t noticed much of an improvement in public service and I’m pretty sure you haven’t either. For all the promises of increased efficiency from technology, we now have 370,000 more people in public service than we did eight years before the iPhone was released. Does anyone have a clue what they’re doing, let alone what value they are adding?
Productivity is one of those economic concepts that gets tricky when it’s applied to the public sector, which is better at measuring (but not controlling) cost than it is at measuring (but not delivering) value. This of course means that the numbers can be manipulated and have little to do with reality. Anyone dealing with DVLA recently knows that.
As shown in the chart below, borrowed from Ewen Stewart’s article here, the public sector is delivering less value per worker that it did in 1991. That’s not Covid, that is a consistent, dismal trend. When politicians (presumably briefed by civil servants) talk about the UK’s productivity problem they’re missing the point – it’s the wretched government that is the problem. The 20 per cent or so of the workforce that is the public sector is holding the rest back.
Jacob Rees-Mogg (probably rightly) suspects that working from home is to blame. Other than a press release and some sarcastic calling cards, what has he done to end the reluctance of many civil servants to work in their office? Nothing, nada, zip, zero, niente. Why? Because our politicians are incapable of holding the machine to account.
While we may be able to afford some fat in the state in boom years, we haven’t had one of those since the government placed us all under house arrest to protect us from flu. In stagnation and recession we can’t. Which means we desperately need some economic growth which in turn requires investment. That is private sector investment: the government has no money of its own and a staggering £2.5trillion debt mountain.
There is no shortage of private sector money in the UK or globally. But that money goes where it can make the best possible return for a given level of risk. The UK used to be one of those, reaping the benefits of stable government and a sensible tax regime. Contrary to the predictions of many, Brexit did not change that; if anything it improved it as the UK was no longer at risk of tax harmonisation and, in theory, the City could escape the shackles of the onerous, ill-written MIFID and GDPR regulations. Sadly, unforgivably, that has not been delivered.
Lending to stable governments is seen as ‘risk-free’ because stable governments don’t default. Rising government interest rates therefore increase the required return on any investment in anything else as that investment is riskier. The return on the investment comes from the profits, after tax. Less tax, more available profit, more return, so more investment. Simple. It worked for Ireland, as I wrote here.
Yet Mr Hunt’s plan to stimulate growth is to increase the rate of corporation tax from 19 per cent to 25 per cent, thereby reducing the potential returns on any investment. As Ireland proved. Sure, the government has yet another cashflow problem with the cost of the energy price guarantees and the spiralling costs of its inflation-linked debt, but destroying investment in the UK won’t solve that. If Hunt needs to cut spending he should start with a recruitment freeze (which costs nothing) and then take a hard and prejudiced look a what value those extra 370,000 deliver. If their employment cost is £50K each that’s £19billion of cuts right there, which is about what he’s looking for in his corporation tax rise.
The chart below from HMRC shows total business taxes (of which corporation tax is by far the most significant). The private sector is paying more tax (in absolute terms and as a proportion of GDP) under a Conservative government than it was in the Brown years. Is it any wonder that we have sluggish growth?
Mr Sunak recently said that only idiots thought he could cut tax. Perhaps. But that does not make his Chancellor’s proposal sensible, sound, sustainable or survivable.
If Sunak won’t run the country as a conservative, what is the point of him or his clapped-out Conservative party?