Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.
Two months ago on this site, I pointed out that the real economic problem was not austerity – we have the highest number of people in employment ever – but, rather, the lack of growth in real pay, in turn the result of an overall fall in productivity. In the private sector, tax credits subsidising employment, like the ‘outdoor relief’ of the Speenhamland system 200 years ago, make labour artificially cheap to employers who can substitute labour for capital investment.
But the major cause of Britain’s lack of productivity growth has been the explosion in public sector spending under Gordon Brown. Between 1997 and 2005, public sector spending rose from £336 billion to £517 billion a year – some 66 per cent, during which time the cost of living rose by 15 per cent: in other words, the real increase was 50 per cent.
Public sector output has increased little, so public sector productivity has fallen dramatically. This has meant that the private sector has had, and still has, a struggle to finance the public sector. Our private sector performance compares favourably with most of our peers, especially as regards the creation of new businesses and entrepreneurial investment. The real UK weakness is the mismanagement of our now huge public sector. From education to the NHS to the welfare system, the Environment Agency, the Energy department and more, the lack of value for money which is achieved is “breaking the nation”. The public wage bill alone is now £200 billion, of which administration is a preposterous £20 billion per annum.
More than a decade ago, an American delegation, backed by the Taxpayers Alliance, studied our public services and reported that, on the matrix of the costs of running US public services, they could supply the same level of public services in the UK for £80 billion a year less. Those in the private sector who have had extended dealings with any of the departments of state are well aware of the incredible waste that occurs, compounding government debt to be paid off by the next generation.
The only two Ministers who tried to tackle the waste in their departments were both sacked by David Cameron for their efforts: Michael Gove at Education, where the head count had been cut by 7,500 to 5,500 (and Gove advised that 800 people would have been more than enough to run the Department) and Owen Paterson at DEFRA, who received regular death threats for his efforts to cut its head count, where there are more DEFRA employees than there are UK farmers.
Back in 2003-05 as Shadow Chief Secretary to the Treasury, I was given the task of organising a professional review of public spending with a view to fighting the coming general election on the issue of cutting wasteful public expenditure. I put together a substantial team of consultants and professionals: its overall conclusion was that £80 billion could be saved – interestingly, in line with the US advice – but it was decided to reduce the target to £30 billion as being more politically acceptable! It turned out that there was insufficient interest to make cutting wasteful expenditure a major theme of the 2005 general election, and I was removed!
Interestingly, Angela Merkel has made the point publicly that Europe cannot afford to continue increasing public spending at the rates of recent years.
If we want to get our economy growing faster, and to exploit the Brexit opportunities, we need a united Cabinet with tough leadership to sort out the public sector. If we do not do it ourselves, sooner or later we will have a repeat of the Denis Healey experience of being forced to borrow from the IMF at the cost of implementing their programme for cutting excessive public expenditure.
It looks as if Yanis Varoufakis may be right in warning us that the negotiations with Brussels will be a futile exercise and waste of time in which each concession we make will be met with further extra demands, as has happened in the first round, so that the deadline arrives with no deal.
France and Germany will prolong uncertainty deliberately by stalled negotiations, suiting their attempts to woo more jobs from the UK to inside the EU. Perhaps the plan as both France and Germany cannot afford to lose their huge exports to the UK, will be, at the eleventh hour, to offer usa free trade deal, having already grabbed some chunk of our services and trade industries, in return for us paying a fat annual fee. My perception from the outset was that the negotiations would come down to how much we are willing to pay, where otherwise France and Germany will have to finance the growing black hole in EU finances.
Varoufakis advises we should legislate unilaterally, (as regards immigration and the supremacy of our legal system), withdraw from all formal negotiations, and invite Brussels to come to us with a realistic offer of free trade.
We need some of that Dunkirk spirit to call the EU’s bluff: otherwise we risk ending up with a material loss of trade and accepting costly free trade arrangements crafted to the EU’s interest. The Conservative Government has the ability to be tough in protecting the national interest, which will now likely require us to leave with no deal. We need to wake up to the reality. There is no reason why the EU should now treat the UK more constructively than they treated David Cameron.