Public Sector Workers: Living off Our Taxes (2011) by D.J. Webb

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LIVING OFF OUR TAXES
by D.J. Webb
Published on the LA Blog
7th November 2011

There is nothing more frustrating than having to pay tax and national insurance so that public-sectors workers can earn more than you. People in the private sector face greater job insecurity and have less lavishly funded pension arrangements, where such arrangements even exist, and yet they are the golden goose that has to be repeated slaughtered in order that state workers can have secure and higher-paid jobs with astonishingly generous pension provision.

In many ways, this is the number one political issue in Britain today, with concern over town hall “fat cats” and other public-sector bureaucrats earning more than the prime minister reflected in regular articles in the press. The government is apparently seeking to restrain public-sector pay, but doing so in circumstances where the real purse strings are controlled by tens of thousands of personnel and finance officers in the middle echelons of the state. The government can only set the general goal of massaging down pay, but is not in a position to review every single pay award. It follows, therefore, that it would be easier to shut down whole areas of government than to expect the bureaucrats themselves to operate in a way that saves public money.

Low-paid bureaucrats managing large empires?

The general approach towards the public sector is exemplified in the recent Hutton Review (overseen by the writer/journalist Will Hutton) of fair pay in the public sector (see www.hm-treasury.gov.uk/d/hutton_fairpay_review.pdf). The report seeks to compare public and private-sector pay levels, and concludes that the lower-paid ranks of the public sector are better paid, and the higher-paid ranks less well remunerated, than the equivalent jobs in the private sector. The implication is that public-sector salaries should match, or nearly match, private-sector ones, even though private-sector ones are dependent on turning a profit, and the public-sector jobs, by contrast, are the function of bureaucratic empire-building, with no concept of profit. The Hutton Review points out, “The permanent secretary at the Home Office earns earned between £192,000 – 197,000 in 2009-2010, managing a turnover of £10 billion. Anyone running a private sector operation of that size is on a median package of £2.5 million”. It sounds like the permanent secretary is on low pay; maybe he should have an immediate pay rise of £2.3m?

The size of the public sector means that, were the principle accepted that senior civil service pay be linked to the size of departmental spending, public-sector bureaucrats would be the top earners in the economy. What private-sector company employs as many people as the NHS? Should the senior NHS bureaucrats therefore take home millions a year, leaving stockbrokers and top bankers for dust? This approach to public spending is not, in fact, an attempt to argue that senior civil servants should earn millions, but rather to argue that they are already relatively low-paid compared with their counterparts in the private sector, and so cannot be expected to face serious pay austerity. The proponents of the public sector do not pause breath even to ask if a pen pusher in Whitehall should be managing a budget of £10bn. Surely, the size of such organisations is an indication that technocracy has proliferated out of all kilter with the original roles of such bodies? The size of the budgets being controlled by public servants is not in any way an indication of their unfair pay, but in fact an illustration of the huge burden the public sector now represents on the private sector, whose taxes are the source of all expenditure, public and private.

It was reported in the Telegraph (http://www.telegraph.co.uk/news/politics/8012668/Public-sector-pay-9000-...) that 9,187 public-sector workers earned more than David Cameron’s £142,500, with 38,000 earning more than £100,000. However, this survey was based on freedom-of-information requests to hospital trusts, education authorities and police forces, and probably does not cover the entire public sector. In the same article, published in 2010, it was stated that the former Commissioner of the Metropolitan Police, Paul Stephenson, earned £280,489. It is simple to show that there are many executives in the private sector earning more than £280,489, but it is unclear why the assumption is that public-sector pay has to keep pace with private-sector pay.

The Hutton Review explains this in terms of attracting qualified staff in the market, saying “The UK has to guard against making the public sector a fundamentally unattractive place for those with talent and drive. Management roles in the public sector are becoming more complex and risky whilst elements of the reward package are being cut back. The talented and motivated will only want to enter a devalued public service to the extent they are paid what they can make elsewhere”. We notice immediately the special pleading that argues that those “with talent and drive” should be working for the state. This gets wealth creation back to front. Those with talent and drive should be in the private sector, and in general they are. People do not voluntarily choose to earn six-figure sums in the public sector where they could be earning seven-figure sums in the private sector. The senior bureaucrats got where they are, not by talent and drive, but by a system of promotions according to seniority and by espousing political causes. Paul Stephenson, for example, during his time in office, would have been very well aware that his job required him to prioritise “racism” over violent crime, and to allow crime (rape, burglary, etc) to flourish, where to clamp down on it would offend politically protected minorities. By mouthing politically correct nostrums, and in a public-sector culture where there is no way of assessing success or failure (crimes rates would indicate that police bureaucrats are failures), such people are allowed to eventually claim large salaries, objectively large salaries, regardless of whether an equivalent manager in the private sector could earn more or less.

Do we have to pay such high salaries for senior personnel?

It is an interestingquestion whether highly paid public-sector workers could earn more elsewhere. Those who can find better-paid jobs in the private sector have probably already left the civil service in order to take up those jobs. While, individually, highly qualified public-sector workers could find attractive employment elsewhere, it is an open question how tens of thousands of them would fare at once were whole departments of state closed down. If the 38,000 workers earning more than £100,000 a year—and bearing in mind these are probably only those in education, health and the police force—to look for work simultaneously, the relatively few posts offered at £100,000 a year or above would be overwhelmed. It is claimed that only 7% of top-percentile jobs are in the public sector (top-percentile income was anything above £149,000 in 2007/08; see http://www.hmrc.gov.uk/stats/income_distribution/3-1table-jan2010.pdf), and so the loss of all of these would boost the number of people available for top-percentile employment marginally, but most positions are already taken, and relatively few new jobs come up each year, and the expansion of the state in recent years has logically meant that a higher proportion of well-paid jobs advertised have been in the public sector.

It seems clear that large numbers of senior civil servants could not find equivalent jobs were the state to be suddenly slashed. While only 7% of top-percentile jobs are in the public sector, the percentage of jobs offering salaries above £50,000 (roughly the top decile) that is accounted for by the public sector is probably larger than this, given that the public sector is progressively more generous further down the income pyramid. So while the public sector accounts for the minority of jobs in the UK, a significant shift in the employment market would be occasioned by a drastic reduction in the state.

A marginal increase in supply can have a large effect on prices. A 10% increase in the numbers of qualified personnel available for jobs currently offering £50,000 and above in the private sector amounts to a significant easing of the employment market for those positions. It is likely that middle- and senior-level pay in the private sector are therefore being supported by the role of the public sector is siphoning off enough of the qualified workers to tighten the job market at the senior end. This is possibly the reason why, despite high taxation and income redistribution, the UK has become a markedly more unequal society in recent decades.

How high are public-sector salaries?

A full breakdown of pay in the relatively overpaid public sector is hard to come by. The obfuscation claiming that top salaries in the public sector are, in fact, low relates to the fact that there are people in the private sector earning millions a year, particularly in the financial sector and in the sporting and television worlds. While there are people in the public sector making hundreds of thousands a year, none of them takes home more than a million, and so it is possible to argue that at the top end, the public sector is less well remunerated. The Hutton Review argued that the share of top-percentile wages earned by public-sector workers has been declining. Only 7% of the highest 1% of earners work in the public sector, and those 7% receive only 1% of the total wages of top-percentile earners. At first glance, that appears to show that public-sector pay is restrained, but the top 1% of earnings is a very, very high level of income, and this way of presenting the figures just means that that no-one in the public sector is taking home £1m or more a year. Much is made of the fact that only 1 in 280 public-sector workers earns more than £150,000 a year, compared with 1 in 85 in the private sector. Once again, this level of income is very high—six times the average wage and more than the prime minister earns. That anyone in the public sector earns more than £150,000 a year is surprising. The 1 in 85 in the private sector who earn that much are working in a competitive environment; those in the public sector who earn that much are empire-building on the back of state funds, and not required to show a profit. It is interesting to note that the proportion of public-sector workers taking home more than £150,000 a year is lower than the equivalent proportion in the private sector, but it would be more interesting to see the figures laid out on a similar basis for lower incomes. How many public-sector workers take home more than £50,000 a year? And what proportion of earners (public- and private-sector) are they?

The state does not provide the numbers broken down in that fashion, and even if it did, there would be many questions to resolve over the definition of “public sector”. A report on public-sector pay by Policy Exchange (http://www.policyexchange.org.uk/images/publications/pdfs/Controlling_pu...) is less committed to maintaining the public-sector gravy train, and so makes a number of interesting points. First, the Office for National Statistics (ONS) defines public-sector employment at 5.9m, but the Labour Force Survey, based on people’s own descriptions of their employment, shows that there are 7.3m public-sector workers, around 20% of the entire workforce. Even here, we could ask whether all sections of publicly financed employment were included, including quangos and largely state-funded charities. Importantly, it shows there was a 21% increase in public-sector employment over the period 2002-09, and so employment in the public sector grew at a rate nearly five times as fast as the equivalent rate in the private sector. This confirms the anecdotal impression that in recent years the public sector has been advertising a disproportionate number of jobs, and so the impact of new public-sector jobs on the job market has been far greater than the overall proportion of employment in the public sector would suggest.

Second, whereas official reports often emphasise the “mean” or average salary, the “median” (or middle) salary is used in the Policy Exchange report as a better guide to what is happening to public-sector pay. That is because a small number of very well-paid private-sector jobs distort the mean used for comparison. The median salary in the public sector is 12% higher than in the private sector, and on an hourly basis (including longer holidays and shorter working hours) the median public-sector salary is 30% higher. The bottom decile of public-sector pay is particularly well remunerated compared with the private sector, a fact that amounts to a conscious choice to waste public money.

Interestingly, public-sector pay has persistently outpaced private-sector pay, but it is never argued that public-sector bodies have been “forced” to raise pay rates because no-one applied for their jobs. The difficulty of attracting qualified staff in an employment market does not explain why public-sector productivity fell by 3.2% in 1998-2007, as measured by the ONS, while private-sector productivity rose by 22.8%. It seems clear the availability of public money is the key variable in allowing public-sector pay to rise. The Policy Exchange report shows that if the public sector headcount had remained constant and pay increased at the same rate as the private sector over 2002-09, a saving of £25.2bn would have been produced, money that could fund a desperately needed hefty tax cut were that period of profligacy reversed today.

Does public-sector largesse create wealth?

The state and its supporters advance a number of justifications for high public spending. The Hutton Review opines, “The public sector is a co-creator of wealth and an important source of social wellbeing. Much of the hard and soft infrastructure that supports wealth generation – in energy, transport, science, education and skills, the protection of intellectual property and so on – is created by the public sector. The public sector mitigates personal risk otherwise borne by citizens, by providing national defence, law and order, and social security. Individual and public health is underwritten by the National Health Service”.

This indicates that public-sector spending helps to create private-sector wealth, in a kind of symbiotic relationship. However, this explanation is more than a little self-serving. Much of what the public sector does is not conducive to wealth generation, including “education” in non-subjects and/or political propaganda. Do degrees in sociology support economic growth? Where infrastructure provision does indeed help wealth generation, public funds do not create that wealth, as, after all, those public funds are garnered in the first place from the private sector in the form of taxation, and so it is the private sector that is funding the infrastructure. It would be possible to design alternatives to publicly funded infrastructure provision. The fact is that the public sector has no money of its own that is not derived in some way from the private sector.

Do technocratic roles require expensive managers?

The Hutton Review also justified public-sector pay by reference to the fact that “management roles in the public sector are becoming more complex and risky”. This assumes that we should live in a technocratic society where large public-sector bodies are run by experienced technocrats. Taking the example of policing, the original approach to policing in this country was to prevent crime by beat patrols, and often by stationing police officers in homes on housing estates. It is only when crime has been allowed to develop to the level of several million a year (not forgetting the police refusal to record many crimes) that policing becomes increasingly technocratic. A network of local police stations managing beat patrols would not require six-figure salaries, and it is questionable whether the Met would cease to function operationally were the Commissioner, and all other officers on six-figure salaries, jointly to call in sick one day. It is the culture of reports, presentations, political campaigns, outside consultancies and managerial strata largely engaged in discussing the work rather than doing it that enables large managerial structures to infest what ought to be fairly routine organisations, such as the police force. The police force has large personnel departments, large procurement departments (ordering flash cars, where the public wants foot patrols), finance departments, paper/electronic record departments, in a self-proliferating structure that has eventually come to require layers and layers of managers who can offer technocratic bureaucratic-management skills.

I am quite sure everyone in the public sector is doing something, but, unlike the private sector, there is no tradition of continual questioning whether things have to continue to be done at all. Large back office functions will never be pared away. Once a race-monitoring department has been established in the Met, as well as a carbon reduction office and a community liaison department—these are never going to go away. They will tend to grow in size, although their original purpose was dubious as an item of public spending in the first place. And this is why the Met employs senior bureaucrats on £280,000 a year. To be truthful, the Commissioner of the Met is not a real police officer. He does not pursue villains. He is just a civil servant. Furthermore, above the rank of Inspector, it is questionable whether any of the police officers are genuine police constables.

Wasting our money on “non-jobs”

Public-sector “non-jobs” have given rise to criticism. It is generally claimed that all such jobs are concocted by the Daily Mail, and that such jobs have been eliminated. Some councils with “roller disco coaches” and “bouncy castle attendants” no longer employ people in those positions, but the question still arises, “who authorised the creation of those posts in the first place? and what legislation justified spending money in those areas? were the local government officials responsible for wasting money in these areas sacked?” The answer is probably, “no”. However, some observers claim that local government non-traditional jobs (jobs not in education, social care and rubbish collection) have risen to nearly 750,000. North-east Lincolnshire has advertised a position as Future Shape programme manager on £70,189. This role is ongoing, and the council claims that it could help save £9m, by “reshaping what we do and how we do it, in line with the government’s Big Society and broad localism principles”, according to one official. It seems more likely this is a job giving presentations and holding vacuous meetings.

Abusing performance pay

Among other issues thrown up by public-sector pay is “performance pay”. We are told that the reason why people choose to earn less in senior roles in the public sector is due to their public-sector ethos. This is then contradicted by the demand for performance pay. These bonuses can be very high. The CEO of the Olympic Delivery Authority received a bonus of £210,000 in 2008/09, equivalent to 55% of his base salary of £384000. The Commissioner of Transport for London earned a bonus of £146,400 in 2008/09, 42% of his base salary of £384,444.

Oddly enough, there is little real expectation of a positive performance in the public sector, which is responsible for education skewed towards political propaganda, hospitals that fail to keep themselves clean and that host killer bugs, police forces that have a tolerant attitude towards violent crime, and border agencies that make an autonomous decision to let thousands of immigrants into our country unscreened. What is the performance pay for? Surely performance pay is appropriate only in the private sector, where the turning of a profit can provide one point of assessment of an organisation’s success. In both the public and private sectors, an individual’s contribution towards organisational success can appear difficult to prove, and it seems likely that performance pay is just one way of increasing the salaries of senior state officials.

That performance pay is just a way of increasing salaries is admitted by the Hutton Review: “In the public sector performance elements are often paid out of a pot set aside for that use: so ‘bonuses’ are not really additional. In other words, there is a set amount of cash for remuneration but its allocation amongst staff will vary according to performance. ‘Variable pay’ is often a more accurate and less misleading term than ‘bonus’”. This appears to be part of an attempt to forestall capping public-sector bonuses, by arguing they are really part of base pay; they are certainly regarded as an entitlement by their recipients.

National pay bargaining and redundancy payments

A further problem is national pay bargaining and the cost of public-sector redundancies. There is no reason why someone working in a school in a small northern town should earn the same as a teacher in the south-east. A privatisation of the education system along the lines of a voucher system would require all local schools to run their own pay policies, in line with the fees that could be earned from local residents. This would help to create an economy where poorer areas were much cheaper to live in and to buy necessary services in, whereas at present those living in small northern towns have to pay high taxation rates to fund national public-sector pay agreements.

Redundancies in the public sector are also expensive. I would argue that there should be no redundancy pay at all in the public sector. There should be no “right” to public-sector work. A three-month notice period, with no explanation required, and no unfair dismissal claim possible, would make it easier to slim the state. It should also be illegal for state officials to negotiate with public-sector unions. Public-sector workers who go on strike should all be sacked automatically and denied public welfare provision. Public-sector employment is a privilege and it should not be turned into a general right to squeeze the public purse.

The pension scam

Another issue is pension provision. The Policy Exchange report showed that between 1997 and 2008, the proportion of public-sector workers without a pension scheme fell from 21% to 16%, whereas in the private sector the numbers uncovered rose from 54% to 63%. In addition to having higher median salaries, and even higher salaries on an hourly basis, public-sector workers are able to force private-sector workers without pensions to provide for their retirement plans. It is difficult to understand why the public-sector unions do not call for a general rise in the state retirement pension, rather than forcing those who depend only on the state retirement pension to pay more into the public-sector pensions. Libertarians would, of course, like to see more dependence on personal schemes, but the fact remains that there is a basic inequity in the UK’s pension system that can only be remedied by closing all public-sector pension schemes. The more advantageous defined-benefit schemes (including final-salary pensions) cover only 8% of the private-sector workforce compared with 80% in the public sector.

All these factors taken together indicate that public spending is having a significant distorting effect on the general employment market. The state itself has become a pyramid scheme, justified by state programmes to boost equality. The result has become an increasingly inequitable job market, with the pension scandal particularly glaring owing to its long-term effects on people’s livelihoods. We cannot afford to support this superstructure of hangers-on any more. If any public-sector roles do indeed require staff who cannot be attracted for less than £50,000 a year, then we need to axe entire programmes and/or restructure the state so that it functions in a simpler and less bureaucratic way. A nightwatchman state ought not to require such specialised employment. The shift required is as much cultural as economic. I can only hope upcoming economic difficulties force the state’s hand in terms of cutting deeper and restructuring further.