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
