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The Private/Public Sector Divide – Professor Sir Donald MacKay

It has long been a cornerstone of the UK’s political economy that social and economic cohesion may require some redistribution from higher to lower income regions. This should meet two objectives – to provide lower income regions with an appropriate provision of public services in the here and now; and a further transfer of income to help finance longer-term capital expenditure which will benefit local areas and the wider economy.

The Barnett Formula and the Autumn Statement

Since the late 1970s the Barnett Formula, subject to periods of benign neglect and, then, numerous tweaks and alterations, has tied Scottish public expenditure in departments managed by the (then) Scottish Office and, now, by the Scottish Government, to the expenditure of the equivalent English departments. The estimable Baron (Joel) Barnett used to express his surprise at the long life of his creation. Yet the twinkle in his eye suggested a recognition that benign neglect, particularly the long periods during which England’s population rose more rapidly than Scotland’s population, usually resulted in fiscal changes which favoured Scotland and helped to parry the arguments of those who once looked enviously at the “Scottish” oil revenues accumulating in the UK Treasury!

The onset of the “Great Recession” in 2008 persuaded the former Coalition and the present Conservative Governments that there was a pressing need to bring public expenditure and the public debt under control. As in every recession, this has proved a difficult process and much remains to be done. However, a substantial shift toward increased private sector employment has far outweighed the accompanying reduction in public sector employment, to the consternation of the critics who consider that the “cuts” have been too large and too fast and that there should be an end to further “austerity.”

The fly in the ointment is the Autumn Statement U-turn on the previous policy of “fixing the roof when the sun is shining.” The slower rate of deficit reduction now proposed may not be advisable. The Institute for Fiscal Studies suggests there is only a 50/50 chance that the Chancellor has made the right call. But Napoleon believed that his best Marshalls had been lucky and so far the Chancellor’s luck has held.

Though the SNP may not wish to see it this way, it called earlier this year for a slower rate of UK deficit reduction. This, and the continuation of the Barnett Formula, has meant that the squeeze on Scottish current public expenditure is real but somewhat less severe than might have been feared. Again, the Scottish Government has more margin to increase public investment in Scotland’s infrastructure. It deserves this margin, because it has taken measures to restrain the rate of increase in total public expenditure, while crafting an instrument, the Scottish Futures Trust, which uses public investment  more effectively than was the case under previous Labour/Lib Dem administrations.

Examples of Better Management

In the 1990s, Scottish councils were significantly more labour intensive than those in England and Wales. This was true even where comparison was made between areas with similar geographical, social and economic conditions. These outcomes did not change materially until the advent of SNP government at Holyrood. The council tax freeze, sensibly combined with an attempt to minimise compulsory redundancies, has slowly produced a more sensible managerial approach and quite widespread popular support.

Relative to England, Scottish public sector employment has routinely been a higher proportion of total employment. Over 2010 -14 the reduction in public sector employment in Scotland was 13%, close to the English 15%. As of 2014, the share of public employment in total employment was 21.0% and 16.6% respectively. There is nothing magical about the English figure, but the more of total government spending that is used to finance current public sector employment the less there will be available to finance the public investment which will help restructure the economy to sustain the welcome increase in private sector employment which has been such a feature of the recovery since the “Great Recession.”

And so, in the next blog I will look at the measure proposed in the pre-referendum White Paper – child care- which would be most likely to enhance the supply of labour, which provided much of the dynamic of recent years, and consider how that would be best managed.