Thoughts on politics and life from a liberal perspective

Thursday, 24 September 2009

Riddle me this... public spending cuts

In all the debate there has been about public spending and the cuts that it is now apparent will be necessary to get a grip on borrowing something has been bugging me.

I co-own and co-run a business. Through this I also know lots of other people who run businesses. I know that throughout industry companies have been needing to cut costs and often one of the largest outgoings is the salary bill. Now traditionally the way to cut the salary bill is to make people redundant, however from what I can tell many companies have been trying to be a bit smarter about this and instead in some cases have been asking staff to take salary cuts and/or reduce the number of hours they work. Often the directors will lead the way in this reducing their own salaries when times are tough.

By doing this, companies can often reduce their outgoings quite substantially. Of course it is far from ideal for employees to have a reduction in their salaries but in my view it is better than redundancies and once the economy improves I would expect these companies to put the salaries back up to where they were previously again.

In fact it makes sense from the perspective of the company as well. Making people redundant is expensive and time-consuming. Companies that go down this path may live to regret it in a year or two when they suddenly find they have a shortage of staff and then have to start recruiting again (also not cheap) when they have only recently made staff redundant.

The thing that had perplexed me in all of this is that this sort of sensible, pragmatic attitude seems to be almost absent from the debate about public spending. Anatole Kaletsky has a piece in The Times today where he argues pretty much what I have been thinking for a while. This section leapt out at me:

According to the Institute for Fiscal Studies, the “eye-watering” squeeze needed to bring Britain’s public finances back into reasonable balance translates into a reduction of 8.6 per cent in departmental budgets spread over three years. If the directors of any private company sent their line managers an instruction to reduce costs by that amount over three years, with no loss of customer service or output, this would not be considered an insuperable challenge, still less a managerial nightmare.

I suspect one of the main things managers in this situation would consider is pay freezes/moderate reductions and would do their best not to lose staff.

Why can't this approach be taken in the public services? Why do any mooted cuts always end up being translated into "X THOUSAND TEACHERS!" or "Y THOUSAND NURSES!" by political opponents?

I am not saying there won't be problems trying to do this, of course there will as there are in the private sector but they are not insurmountable. In my view the highest earners in the public sector should be asked to contribute the most. Weren't doctors for example given a ridiculously good deal a few years ago? Well surely now that times are tough their pay deal could be revisited. The same could be applied across other areas too.

I would suggest that a limit should be pinpointed though and below this no salary freeze/cut should apply. I certainly would not want to see those lower paid public sector workers having to contribute.

An approach like this could save several percent of public spending I am certain and once it has been implemented we may well find that few further measures are needed to get our spending back on track.


Cardinal Richelieu's mole said...

You have been reading your fellow Berkshirista John Redwood's blog, haven't you! ;-)

Mark Thompson said...

I haven't actually (at least not recently). I am just purely basing this on my own perception of what is happening in the private sector and asking why this cannot be applied to the public on too.

Anonymous said...

If it's a useful comparison, the increase in the cost of running Westminster (i.e., Parliament)is not far off that annually over a decade.

Mr Cameron quoted "doubled since 1997" in a speech, and I have no reason to doubt it - though the increases are very "lumpy".

Uwinsom Ulosum said...

This is too logical for the public sector, especially Labour-supporting minds, to comprehend.

You certainly describe how I see things should be.

But private sector companies do it because they HAVE to, to survive.
Mr Brown assures the well-paid union activists he can keep giving inflation busting pay rises on forever borrowed money (he will not respond to a technical recession, only a technical visit from the IMF, by which time it will be too late).