How the public sector has been propping up the UK economy

A report suggests the public sector's growth since 1997 has masked the decline of the private sector.

Last Updated: 31 Aug 2010

The tendency these days is to look back on the period between 1998 and 2007 as a happy time for the economy – Mervyn King even famously characterised it as ‘NICE’ (Non-Inflationary, Consistently Expansionary). But according to a report by academics at the University of Manchester, this growth was largely powered by New Labour’s huge expansion of the public sector – in other words, we had an ‘undisclosed and unsustainable’ national business model that relied on using taxation to disguise our continuing national decline, not least in the private sector. Cheery stuff. And apparently, public spending cuts are not going to improve matters…

The researchers, from Manchester’s Centre for Research in Socio-Cultural Change (aka CRESC, oddly), have been trying to quantify the economic contribution made not just by the public sector, but also the ‘para-state sector’ – i.e. those activities which are not technically part of the public sector, but depend on Government revenue or support (like private rubbish collection firms, for instance). According to its estimates, by 2007 this sector employed about 1.7m – about a third as many as the entire public sector. That’s a lot of people reliant on Government money, and it’s only been possible because of a (ridiculous and clearly unsustainable) 50% rise in real government expenditure.

Between them, CRESC reckons the public and para-state sectors accounted for 57% of the 2.2m new jobs created between 1998 and 2007 – including 81% of jobs for women (partly because there are more part-time jobs available), and up to three-quarters of jobs in ex-industrial regions. By comparison, the growth in private sector jobs was relatively weak – for instance, the financial sector may have contributed an increasing large slice of GDP, but the number of people it directly employed remained pretty flat over the period (and most of them were in the South-East).

The implication, it suggests, is that the Government has used ‘taxation and the redistribution of the fruits of prosperity to make capitalism work’ (not particularly shocking from a Labour administration, we'd argue, although the scale of it certainly is). But the flipside is that if public spending is suddenly slashed – as the politicians are now promising – it will have serious employment consequences, particularly for women and the regions. ‘The state is filling in for, not crowding out, private activity,’ the report says. ‘[Places like] the North East or the West Midlands have lost an old industrial base and not discovered any autonomous private sector replacement.’

And in the longer term? ‘The public sector cannot sustainably infill for an anaemic private sector whose capabilities were not transformed by the Thatcherite changes of the 1980s... We need a debate about a new kind of national business model’. In other words, the bad news (as usual with academics, the cynic might argue) is that those cheerful souls at CRESC don’t actually have any answers to these rather thorny questions...

In today's bulletin:

The recession is over - or is it?
Apple reports record profits as recession fails to bite
Tough road ahead for Jaguar Land Rover after Smith's surprise exit
Employees can't get no satisfaction, says CIPD
How the public sector has been propping up the UK economy

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