There is an interesting quote from Madeleine Bunting in the Guardian:
There was a fascinating analysis in a Compass report last autumn, In Place of Cuts, on how much money the government saves by axing a £25,000 public sector employee. After you've calculated for all the lost income tax and national insurance contributions, and then factored in all the benefits this sacked employee would receive on jobseeker's allowance, guess the grand total saved? Less than £2,000. And that is before one tries to put a figure on the wider social costs of unemployment – depression, rise in illness, risk of long-term withdrawal from the labour market. It's a no-brainer.
Such arguments are heard regularly in private sector settings. For example, at the time of the withdrawal of BMW from the Longbridge plant in 2000, there were a number of arguments for government subsidy on the grounds that the cost of supporting workers in unemployment, the lost tax revenues, and so on outweighed the costs of subsidy.
But the claim is quite wrong, and fundamentally confused, nothing more than a classic canard. For the key gain to the economy is ignored in the calculation, namely the value of the output the worker will produce if she finds new employment doing something that adds, rather than destroys value. The same is true of the capital employed in the worthless enterprise – machines, plant, land. By being re-directed from activities that produce less value than they use up, such capital can become productive again.
Many parts of the public sector are pathologically unproductive. Public sector productivity actually contracted over the decade from 1997-2007, by 3.4%, whilst productivity in the rest of the economy rose by nearly 28%. The scope for public sector staff to be redirected into more productive private sector activities amounts to the order of one half of their total output (public sector workers, if re-employed in the private sector, might produce half as much again as they currently do in the public sector, simply by working at private sector productivity norms) – a huge potential gain.
Identifying over-manning and cutting down on excess staff will obviously not be a pleasant experience for those that have to find new jobs, but it will not be economically inefficient in the way Compass and Bunting claim.
Andrew Lilico is the Chief Economist of Policy Exchange