The Left’s mistake

The Left’s mistake
Iain MacWhirter, heraldscotland
20.06.10

It was meant to provide for the common people but now it’s bloated and subsidised by the poor. Why can’t the Left get real about the public sector?

It started innocently enough, with the occasional dip into the Financial Times; the odd lost weekend spent with The Economist. I could handle it, I thought. I’m a big boy who knows when to stop. But as the financial crisis deepened I found I had become habituated to a daily fix of financial pornography. I was soon into the hard stuff: fractional reserve banking, credit default swaps, the Black-Scholes option pricing model. I even found myself agreeing with Niall Ferguson, the conservative historian, on the need to break up the banks.

There was no getting away from it. Though a lifelong social democrat, I was starting to think like a Tory. Not a New Labour neo-liberal or a ConDem Cameroon but something rather different. I realised I was starting to think like an old-fashioned fiscal conservative – wary of state control and the growth of bureaucracy; anxious about the way markets are being manipulated, in everything from housing to pensions; concerned that governments seemed to believe that you can solve a personal and public sector debt crisis by more public and private debt. I’m not alone. The 2007-9 financial crisis has been a transformative event for many on the left. Liberals such as Vince Cable and Nick Clegg are almost more Tory than Tories when it comes to things like public sector pensions and cutting state spending.

I haven’t gone over entirely to the dark side. I remain a social democrat who believes the market economy needs to be regulated, banks nationalised and incomes redistributed. However, on one issue I am no longer in the traditional leftist camp: the public sector. I believe many on the Left, in leaping to the defence of public sector salaries and pensions, are failing to understand how the public sector has changed and how the material circumstances of state employees have departed from those in the wider economy. If called upon to go to the barricades for the likes of health service managers, police chiefs and university principals earning over £100,000, or in defence of the salaries and gold-plated pensions of council bureaucrats and civil servants, I would have to say: sorry, comrade.

We now have a bizarre situation where a relatively privileged class of employees – about 24% of Scotland’s workforce – is largely being protected from the harshest winds of economic change by virtue of their employment by the state. In the private sector, the collapse of manufacturing, the decline of trades unions and the influx of cheap immigrant labour has crushed the earnings of working people at the same time as the cost of necessities such as housing has exploded. In 2008/9, according to the Office for National Statistics, salaries in the private sector fell by 7.7%, the worst drop in 60 years, while salaries in the public sector actually rose by 3.2%. When you see the lavish offices that councils have built for themselves in cities like Edinburgh and Aberdeen, often as front-line services are run down, you can tell that something fundamental has changed.

It used to be that public sector workers were badly paid. Not any more. Average wages in the private sector are now considerably lower than in the public sector – by around £2,000 a year according to the Office of National Statistics. Median weekly full-time earnings are £539 in the public sector and £465 in the private sector. Whisper it, but teachers, nurses and doctors are actually rather well remunerated, these days, as a result of pay settlements such as McCrone. They have security of employment, working hours and pension rights that simply don’t exist in the outside world. There are no jobs for life any more in the modern “flexible” labour market.

The value of private pensions has collapsed as a result of share crashes, inflation and high charges from pension providers. Only 16% of private sector workers still have protected final salary pensions against 85% of public sector employees. Only a fraction of the true cost of these pensions – worth 26% of salary – is actually paid by state employees themselves. According to the Chartered Institute of Personnel and Development, taxpayers contribute £3.39 for every £1 that public sector workers pay in to their pensions. One group of workers which is having its pensions and earnings destroyed is having to shoulder the cost of protecting the pensions and earnings of another group. As someone said: this cannot go on.

Now, this is an uncomfortable place for a social democrat to be because I don’t want to see public sector workers paying the penalty for the bankers’ mistakes. But the point is that it is not going to be the bankers who will pay. I am all for the redistribution of wealth, and I think the 50% tax band is an excellent first step which should be retained. I would apply capital gains tax to second and first homes, end non-dom tax status, tax dividends as income and abolish tax relief on pension contributions for higher rate taxpayers. But even if you could stop the rich evading all this, these measures wouldn’t begin to pay the cost of the deficit. The sums involved are simply too large: around £22,000 per British household. Growth cannot magic this away; the deficit will have to be paid by working families through higher taxes, such as on VAT, which hit poorest families hardest. This imposes a severe moral burden on those spending decisions made by the Government.

We can already see the shape of what is to come. There will be cuts in front-line services while public sector bureaucrats remain insulated by their employment contracts. The first response of council chiefs when the Scottish spending cuts were announced last year was to say that policies such as free personal care for the elderly had become “unsustainable”. I have been to countless public sector conferences where I am told that the spending has to stop on prescriptions, on free bus passes for the elderly, school meals . Curiously, no-one seems to say that the number of council executives should be reduced, or that salaries should be frozen or pension contributions increased. Indeed, I remember speaking with one prominent consultant on public sector finance, Keir Bloomer, who insisted that cutting senior staff was simply counter-productive because it cost too much to buy out their contracts. So services are cut while the staff remain. This is a machine that cannot be switched off.

During the Labour decade, employment in manufacturing declined by more than one million, but this was replaced by a 900,000 increase in public sector jobs. Some have claimed that this was a conscious move by the Chancellor to create a new client class of Labour voters dependent on New Labour policies. I suspect that, as with immigration, it will not have escaped Gordon Brown’s notice that Labour votes increased with the growth of the state, though I doubt if it was quite that calculated. Nevertheless, the numbers employed in the public sector grew to six million – a formidable constituency, especially since many nominally private sector jobs became dependent on public sector contracts.

In Scotland, the impact could not have been more dramatic: it is now hard to identify an autonomous, self-sustaining private sector of the Scottish economy, so dependent has the nation become on public investment. In many parts of west-central Scotland, the state is the only significant employer. Most of the private sector service jobs – hairdressing, retail, catering – that grew up in its wake are dependent on public sector salaries or contracts. If you take public spending out of Scotland you are left with very little apart from whisky and tourism. All the productive industries of the past have been lost; generations of manufacturing skills dispersed. All we are left with is a parasitic financial sector bolted onto an ever-expanding state.

Take Edinburgh, epicentre of the greatest financial crisis in Britain since the 1930s. When the Scottish banks exploded, due to their reckless lending policies and rapacious greed, most of us thought Edinburgh would be on its uppers for a while – the Reykjavik of the UK. But no: the state stepped in and took over. Far from being impoverished, Edinburgh has continued to show all the signs of a city on the make. New car registrations abound. House prices have risen even higher. Edinburgh parents fight to send their children to the best private schools.

What happened after the crash was two-fold. First, the banks were nationalised and their losses taken on by the taxpayer. Second, public sector employment and salaries continued to increase right through the recession. If you look at Edinburgh’s economy it is now almost entirely state-supported. The council is the largest employer with some 20,000 employees. Then there are the four Edinburgh universities with around the same number. After that you have the nationalised banks, the NHS and … that’s about it. Edinburgh looks like a thriving capitalist city, a leading-edge private financial centre, but it is almost entirely built and sustained by taxpayers’ money – taxpayers who have suffered dramatic falls in their income.

This was supposed to be a white-collar recession, but it has been Glasgow and the old industrial centres that have suffered worst. The taxes of millions of workers have been channelled into the public investment and banking subsidies that have allowed Edinburgh to enjoy a privileged way of life.

“Public good, private bad” has been an article of faith of the left for as long as I have known what socialism stands for. The assumption that there is something morally superior about working in the public sector as opposed to the capitalist nexus has been the bedrock on which democratic socialist political parties were built. Early socialists saw the state, rightly, as an instrument through which to redistribute wealth and power and to improve housing, health and working conditions of the masses. Social democratic policies transformed the lives of ordinary people, created the NHS and state education.

And during the Thatcher years there was no question about it: the assault on the state, on vital public services, on the BBC, on the very NHS itself, meant that progressive people had no choice but to stand on the barricades with the nurses, teachers and miners. It was a class war and you couldn’t sit on the sidelines.

And then – something changed. Some time during the long Labour boom of the 1990s the public sector altered – subtly at first, and then headlong as it began to ape the attitudes and appetites of corporate Britain. The complex of market reforms that Tony Blair’s governments introduced were slow-burn. But measures such as the private finance initiative, market testing in the NHS and competitive tendering fundamentally changed the way the state functioned. There was an invasion of management consultants – in its later years Labour was spending £1.7 billion annually on consultancy – which gradually transformed the culture of public service. This was most apparent at the higher reaches of government and the civil service, where there has always been a degree of personnel overlap between the big city institutions and officialdom. But Labour practically turned it into a political programme. Legions of financial secondees from Goldman Sachs, Morgan Stanley even Lehman Brothers before it went bust. Gordon Brown set up endless committees and reviews led by private-sector executives such as Derek Wanless, Adair Turner and Lord Sainsbury.

In Westminster, an entire generation of Labour politicians turned into property developers, using public funds to speculate on the London housing bubble. The corruption of the public sector ethos started right at the top, with the politicians, who were protected from reality by their severance payments, golden pensions and second homes.

However, it extended down through the body politic. The Strathclyde Passenger Transport expenses scandal showed just how seriously things have changed. I’m sure that there has always been a bit of expenses fiddling in the public sector, just as there used to be in journalism. But while the rest of the world cleaned up its act, some public sector officials started sticking their noses deeper in the trough. Time-served officials, with impeccable socialist credentials and long service to the Labour Party, were suddenly paying themselves telephone number salaries and harvesting expenses.

Now, in the great social and industrial confrontations of the past, the miners’, power workers’, nurses’ and teachers’ strikes in the 1970s and 1980s, there was an unspoken bond between public sector workers and the industrial working class. State employees were seen as the shock troops of the Labour movement. It’s no accident that while trades union membership has declined in the private sector it has remained strong in the public services. But there seems very little prospect of this kind of solidarity returning now. The life chances of state employees are just too different from those not protected by the public sector bureaucracy. There is new kind of social divide: between those within the state with their comfortable and secure lives, and those out in the cold with their noses pressed against the window.

We simply can’t expect the huddled masses to pay for public sector privileges. And they won’t.