U-turn would lead us up a dead end

U-turns are the rage. But what might be the consequences of the next one? Seldom has a government in modern times been forced into more policy reversals. Now that such a pattern has been well established, it creates an expectation that future legislation will follow a similar route.

Arguably the government’s most far-reaching ambition in the field of public sector reform is public sector pensions. It is compelled to act because of the rising projections for future pension liabilities. These are being driven by the compelling demographics of an ageing population, greater longevity – and an increase in the public sector payroll of one million in the decade before the financial crisis struck.

But what if this reform also conforms to the law of coalition U-turns? It would be greeted as an unalloyed victory for the public sector unions which have mounted a vociferous campaign against this reform. Last week they brought 104,000 civil servants out on strike across the UK. Further strike action is threatened.

The unions are banking on a U-turn – and their hopes have been boosted by recent events. But the problem of a U-turn for the government here is threefold.

First, it would be seen as an acceptance of a flagrant disparity in pension expectations between workers in the private and public sectors, with the lower-paid in the private sector being taxed to subvent better pensions for the better-paid in the public sector. This is a manifest injustice.

Second, it would be seen as a sign of weakness in the government’s legislative intent and confirm a pattern of assertion followed by retreat. This would put a question mark by the administration’s resolve and credibility.

Third, most serious of all, it would cast doubt on whether the government has the will and resolve to pursue public sector reform in other fields: whether it is able or willing to control the growth in government itself. This in turn would bring the coalition’s central deficit reduction strategy into question. While pension reform is not part of that strategy, the unfunded pension liabilities of the public sector are very much part of overall government debt, where we are critically reliant on creditors to continue funding – and taxpayers ultimately to pay the bill.

Union opposition has played heavily on the caricature of public sector penury against private sector affluence. Public sector workers are held to be poorly paid relative to their private sector counterparts. But figures from the ONS this week debunked this myth. They revealed that the pay gap between staff in the public and private sectors has widened in the past three years – in the public sector’s favour. Average hourly pay in the public sector was 7.8 per cent higher than for an equivalent worker in the private sector, up from 5.3 per cent in 2007.

The unions have argued that such comparisons are skewed because the public sector employs a higher proportion of older workers and graduates who tend to earn higher salaries and that many poorly paid unskilled jobs have been outsourced. But the ONS study allowed for the effects of age, gender, qualifications and skills levels in its comparisons. Even taking these factors into account, public sector employees are paid more than equivalent staff in the private sector, other than at top executive level. Add to this the greater job security and fewer hours worked by public sector staff and the sense of inequity felt in the private sector is all the more acute.

With the widespread opposition within the public sector to measures to make savings and achieve greater productivity, it is easy to see why doubts are being raised over the coalition’s ability to tackle the size and scope of government.

Nowhere are these questions more acute than in Scotland, where the SNP administration has committed itself to a policy of no compulsory redundancies. As for public sector reform, the options set out in the Crawford Beveridge report were quietly put aside and the Christie Commission, with local authority and trade union interests heavily represented, was charged with producing suggestions. In the wake of its report last week, it is fair to say that even those favourably disposed to it were little the wiser about how precisely its proposals would be implemented and what savings would be achieved.

This issue of government expenditure is paramount because its growth has been a major contributor to the horrific debt and deficit totals we now face – the direct result of years of easy option, “free benefits” cop-out politics. It is commonly assumed that we are now in an era of public spending reduction. But the full scale of the debt trap we are now in is illuminated by one stark statistic: between 2010-11 and 2015-16, total managed expenditure is forecast, not to fall, but to rise, from £694 billion to £764bn. The driver of that increase is interest on a relentlessly rising debt total, set to hit £1.3 trillion in 2015-16. And this total does not include any allowance for PFI obligations and unfunded public sector pension liabilities. Add these in, and the government’s true debt obligations are estimated at close to £2.1 trillion and could rise to £3.15 trillion, or 180 per cent of GDP, by 2015-16.

It does not take a bone-headed credit rating agency to tap on the barometer and read a warning of storm clouds ahead. Little wonder that commentators such as Dr Tim Morgan of Tullett Prebon talk of “vortex risk” – economies trapped and unable to recover because of rising debt, high tax, rising interest rates and a collapse in credibility. Fears over high levels of government debt, rising inflation and improbable deficit reduction targets are already feeding market concerns about the safety and reliability of government bonds.

From America to the eurozone, from Greece to Portugal and Ireland to Spain, fears over “vortex risk” are growing. We may wish ourselves to be immune, or that it is tomorrow’s problem, or that it need not affect current government spending and entitlements. We could wish to live forever in yesterday’s world. We could ask that private business or the taxpayer stump up more. We could, as we are prone in Scotland, absorb ourselves in shifting constitutional furniture and not notice the lights going out. And we could pretend that another government reversal, another U-turn, will not much matter.

But we are in a new era, one in which our basic assumptions about what government can and cannot afford to do, must change. The alternative – of denial, of doing nothing and having change forced upon us in a manner more indiscriminate and destructive than we dare conceive – is not going into retreat as this crisis plays out. It just draws closer.