Bryan Johnston: Trim the fat from bloated public sector

SOME years ago, having carefully hoarded loose change in a bottle on the chest of drawers, the family decamped to Disney World. Arriving at the Magic Kingdom I was struck by the serried ranks of wheelchairs lined up at the gate, presumably for the disabled.

I could not have been more wrong. The wheelchairs were there to allow Wilma and Elmer, each weighing well over 20 stone, to take it in turns to push each other around the attractions while the incumbent ingests vast quantities of what passes for food in the US.

To an extent, the UK public sector is the personification of Wilma and Elmer. For 13 years the New Labour administration pursued a domestic policy designed to expand the public sector to bloated obesity. State spending rose a staggering 53 per cent between 1999 and 2009 to 669 billion, focused on regions of the economy which are wealth-consuming rather than wealth-creating.

It is unfortunate, perhaps, that a country's economic management is often predicated by political philosophy rather than financial responsibility. Gordon Brown was committed to the concept of "command economy", a belief that the interests of the country are best served by centralised control. He might also have thought it would do his election prospects no harm if he "encouraged" the support of the public sector unions and their membership.

Investment markets reacted calmly to Osborne's plans for reversing this process, partly because they had been so heavily leaked. Indeed, for all the predictable huffing and puffing from the opposition and trade union leaders, there is a general recognition that the current circumstances cannot be allowed to continue. My gripe is that Osborne and his team persist in talking about spending cuts when what we should be looking at is spending economies.

A terrifying amount of the last decade's central expenditure has been simply wasted through lack of management and an absence of financial control; just consider the 20bn "consumed" by the National Health Service's computer debacle.

One of the fundamental criticisms of state ownership is the lack of the authority of ownership and the profit motive this implies. I am not suggesting that "greed is good", but if there is a belief that there is an unlimited amount of resources then the commitment to ensure that a budget is sensibly spent diminishes proportionately.

Containing waste should be the mantra today, ensuring that taxpayer money is more sensibly deployed than has been the case for so long. Job losses are to be regretted, of course, but what lies ahead must be seen in the context of what has gone before: an explosion of the state payroll which we simply cannot afford.

I am fed up with "bankers" being held to account for the financial mess with which we are now encumbered. Those individuals who presided over the irresponsible lending were not "bankers" but financial engineers. They represent a small proportion of the banking community, unlike retail bankers who are in the business of assessing risk and providing working capital for companies and individuals alike, not lubricating dubious corporate mergers or speculative property transactions.

Once again, a lack of rigorous regulation was the principal culprit. The government enjoyed vast inflows of taxes from the financial community. Just as, perhaps, one might wonder why the non-executive directors of retail banks did not enquire more closely where these spectacular profits were being generated from, is it not reasonable to suggest that the responsible regulatory authorities should have ensured that shareholder funds and customer deposits were being prudently deployed?

Osborne had little choice. His measures will take time to work through the system and hopefully will force the operational economies which have been woefully lacking for years. Absolute central spending will rise over the next few years, even if this will be applied unevenly across the divide. The onus is now on managers to manage and the workforce to work, and for those in genuine need of state assistance to continue to benefit.

There can be no guarantee that Osborne's strategy will succeed, but there is no other option. The UK is effectively bankrupt. If the Chancellor had continued to borrow and spend - the policy of his predecessors - the country's international credit rating would have plummeted, making it almost impossible to borrow on the international financial markets the funds that would be required.

This explains why markets reacted quite calmly to his statement. Of much greater concern to them is what appears to be the policy of dollar devaluation being pursued across the Atlantic, with the danger that this could evolve into currency wars and the imposition of trade tariffs. That is the real time bomb ticking away in the centre of the western economic corporate entity.

Hopefully, wiser heads will stamp out the fuse, but the next couple of months will be critical. It is on the world stage that these challenges will be met, not in the UK.

Bryan Johnston is a director at stockbrokers Brewin Dolphin