Public sector employment under Labour, the Coalition and the current government

06 Jan 2017, by Richard Exell in Labour market

As we get used to writing “2017” on our letters, one of the fundamentals of UK politics hasn’t changed since (at least) 2010: Labour isn’t trusted on the economy. This seems to be as stubborn a public perception as belief in Conservative economic incompetence was for 15 years after the 1992 “Black Wednesday” ejection from the Exchange Rate Mechanism. I think that one of the key elements of the attitudes to Labour’s record is fundamentally wrong: the 1997 – 2010 government didn’t cause the recession by over-spending on public services.

Of course, the TUC isn’t affiliated to any political party, but I worry about the impact on public policy of this perception. The notion that we’re where we are because of a public spending binge is what justifies the belief that we need the “cure” of austerity.

Every so often you’ll hear right-wing commentators and politicians claim that the last Labour government should be condemned for reckless spending, creating unnecessary public sector jobs.

The notion that the UK government could cause a global recession – or, as Angela Eagle once put it, that we had “a recession and a banking crisis in 38 countries because [Labour] spent too much on schools and hospitals” – is ludicrous of course. But a slightly more sophisticated version of the argument notes that the recession hit the UK harder than other countries (which at least is arguable). This line of argument continues that this was because the then government “didn’t fix the roof when the sun was shining” (which isn’t).

I can’t help wondering whether the people who claim all this noticed what was actually going on in the 2000s. Didn’t they notice the Gershon Review of the public sector in 2003-4? Or the 2004 Budget? Or the 2005 Budget? All three underlined the then-Labour government’s desire to keep a lid on the number of people employed by the State.

Measuring public sector employment isn’t as easy as you might think. So far this century, banks have been brought in to the public sector, some have been taken out again, along with the Royal Mail and many FE colleges have been re-classified as private sector. At the same time, the size of the workforce has been growing and, until the recession, so was GDP; the number of public sector jobs would have risen under a government that was trying neither to shrink nor to increase the relative position of the public sector in the labour market. There’s a series of data for the proportion of the labour market taken by public sector employment, using definitions that take account of the movements in and out of the public sector, and I think that’s the best measure to use for this comparison:

I should add that you get a very similar picture if you look at the number of public sector workers instead of the proportion of the workforce. Labour was given office in 1997 by an electorate that was tired of deteriorating services and was willing to pay a moderate price to improve them. That willingness was limited and Labour had decided to prove it understood that by promising to stick to Conservative spending plans for its first two years of government. Trust in politicians was already in decline, so Labour wanted to prove its promises could be relied on and stuck to this, even though the previous Conservative Chancellor openly admitted he would not have done so, had he been returned to Number 11. Substantial extra spending on services did not begin till 1999, and did not feed through to numbers of jobs till the 21st century. The extra money, and extra jobs, were widely accepted as necessary to save services on the point of collapse. By late 2004, the share of the workforce in the public sector was more than a percentage point higher.

But, from 2004 on, the share of total employment accounted for by the public sector stopped growing and then began to fall. By early 2008 it was just 0.3 points higher than in 1999; indeed, the falling share since 2010 can be seen as the continuation of the pre-2008 trend. The big question is how you interpret the second peak in the chart. At the TUC we’d say that rising public sector employment was a consequence of the fiscal policy that helped us get through the recession in reasonable shape, without it, unemployment would now be higher and wages lower. George Osborne famously described “returning to 1970s Keynesian demand management” as “a cruise missile aimed at the heart of a recovery”; the next chart shows what happened to the economy when the cruise missile was called back:

GDP growth, which had been accelerating since 2009, started to slow down within six months of the summer 2010 Budget.

A much more reasonable critical evaluation of the then government’s policies was that they were based on a failed economic model: that City financial services would continue to boom, and their taxes would continue to enable the government to pay for the services and redistribution needed to compensate for that model’s malign social effects. When that assumption proved false, public sector receipts shrank rapidly and produced a substantial deficit:

Up till the recession hit, government spending wasn’t dramatically out of line with government income, but the recession (which would have cut government income in any case) dealt a harder blow to finance than to other industries. At the same time, spending on the ‘automatic stabilisers’ (especially benefits) and anti-recessionary fiscal policies rose very quickly.

The government’s error wasn’t to have spent too much or employed too many teaching assistants and PCSOs, but to have based its strategy on the assumption that the City’s day in the sun wasn’t going to end any time soon. This was a serious error, but it was one made by all the mainstream political parties, opposition as well as government.