The ‘Economist’ predicts meteoric crash in Europe; strikers’ demands pale in comparison

30 Nov

The front cover of this week’s ‘Economist’ pictures a comet on a collision course for the earth, an apt metaphor for the imminent stratospheric scale of destruction we are to face if European leaders fail to solve the sovereign debt crisis, and Britain follows the rest of the continent into another recession.

This has been predicted by Chancellor George Osborne, who is one of those responsible for the government’s New Deal-esque plans for large-scale investment in infrastructural projects like road-building and new power facilities. It has been reinforced by the BBC’s economics correspondent and blogger Robert Peston, who fears the Office of Budget Responsibility’s ‘gloomy forecasts of lacklustre economic growth’ and further decline in living standards are not gloomy enough, because they assume the imminent resolution of the euro area’s many financial difficulties.

In the light of these problems, some might argue it is irresponsible for public sector workers to be going out on protest at the reductions in their pensions today. George Osborne, appearing on BBC Breakfast, was highly critical of the unions for disrupting an ordinary working day at such a critical juncture, and had a fair point; in the leadup to Christmas hard-working families need all the income they can get. Yet while he blamed the unions for failing to negotiate properly with the government, Labour leader Ed Miliband blamed the government for failing to allow negotiations with the unions. Political mud-slinging can get in the way of the real issues at stake. While no one can claim your average GP will be left desperately impoverished by the cuts, lower income workers like nurses, healthcare and teaching assistants, and in Fulham my local library workers, (some of whom subsist on less than £19 000 a year,) may have just cause.

The NAPF, or National Association of Pension Funds, has found disparities even between current public and private sector pensions that justify state employees’ discontent. The median average salary-linked public sector pension being paid out to pensioners is £5,600 a year; that for the private sector is £5,860 a year. How much greater will this gap become once the new measures start to take effect? Furthermore, many protestors argue that the median figure is not representative, because there is a greater range of incomes among public sector workers than private. On the other hand, the aforementioned comparison may be misleading for other reasons.

Around 32% of the private sector workforce, including the self-employed, contribute to personal pensions and other schemes where there is no promise of a particular level of retirement income. Only 12% of private sector employees are currently paying into a salary-linked pension scheme, many of which have been ended by major corporations which seek other ways to encourage their workers to invest in the company’s expansion – perhaps by paying them partly in company shares, or just insisting they are more self-sufficient in planning for the future (giving their employer more flexibility in hiring and firing..?). This is another reason why comparisons between the two sectors are problematic: some 87% of public sector employees are currently paying into a salary-linked pension scheme.

The root cause of complaint is probably that the government is supposed to set an example of good employment policy, not emulate unscrupulous profit-driven free-market firms. Where public sector positions previously held more attraction as being relatively stable and secure, now the ‘nanny state’ has cut its apron-strings and attacked yet another one of the major pillars of the welfare state, national insurance. In fact only a minority of 750 000 voted in favour of the strikes. Specific issues raised included: overall, the intention to engender a £2.8bn increase in contribution payments by 2014/2015; the decision to uprate pension contributions according to a higher RPI rate of inflation to the lower CPI rate; and moving staff from final salary schemes to career average schemes. The updated pensions scheme offered to increase the basic rate by ‘a triple guarantee of earnings, prices or 2.5 per cent, whichever is highest, from April 2011.’ Yet using a career average would most likely end up lower than the previous figure used; the decision to use the Consumer Price Index as opposed to the Retail Price Index will almost inevitably have the same effect, though it is arguably a more comprehensive way of calculating the average cost of the full range of goods and services Britain consumes, and is already used to calculate most other benefits and tax credits.

It is also, moreover, the standard advocated by the European Union, which is also responsible for setting out the rules by which it is calculated.[1]For our daily economic thinking exercise, we can break down and compare the two measures (courtesy of an in-depth explanation from the Office of National Statistics). The RPI is usually lower because it excludes from its sample population the highest earning households, namely the top four per cent of households by income, and pensioner households with three quarters of their income coming from state pensions and benefits. These exclusions represent around 13 per cent of private household spending. The RPI also excludes institutional households. The reason pensioners and high earners are excluded from the RPI is that such households are likely to spend their money on atypical items and including them in the scope of the RPI would distort the overall average. The exclusion of such households is not common in other countries and the position taken in European legislation, which the CPI follows, is different. We are thus becoming more European in at least one aspect of our fiscal policy, for better or worse.

Is it hypocritical to use such a disproportionate means of measuring the inflation rate and cost of living to calculate the remunerations paid to a wide and representative range of public sector workers? Well, probably, but it might be necessary. Osborne told the BBC that without these and other cuts to education, and increased autonomy – and accountability – by local government over health budgets, we might just go bankrupt. Yet is there an alternative the Coalition, and more particularly the Tories, find it politically inconvenient to consider? Many left-wing agitators have long advocated the Robin Hood ideal of a ‘wealth tax’, in addition to the 50% rate already imposed on top earners, yet more realistic economists are probably right in asserting that this would probably only serve to encourage the really wealthy to find ways of reclassifying or repatriating their assets – or simply moving and investing abroad.

Reluctant as I am to condone further measures to widen the gap of social inequality in Britain, and not in the uncertain economic situation of many who subsist on minimum wage and have to pay the expensive costs of living by, or travelling to, their place of employ (it’s Jobseekers for me! Westfield have already hired their Christmas temp workers), the pension workers’ complaints seem a little distant from current concerns about another, imminent, downturn. Unless you are due to reach retirement age within the next five years, better to focus on preventing imminent measures to further clampdown on workers’ rights during employment. A report commissioned by Steve Hilton, a man with major influence on future government policy, by Adrian Beecroft, advocated giving employers the ability to sack unproductive workers with compensation but without giving reason (a measure Nick Clegg managed to forestall, on the grounds it would damage public consumption.) Whether the cause for further economic stagnation is due to unproductive workers and supplies, or lack of demand, is a difficult issue that must be linked also to the lingering spectre of collapse of the European banking system. Uncertainty of this degree deters investors and consumers alike.

Which is all to say, tighten your belts everyone. Christmas is coming; the goose should be getting fat, but instead he is probably fated to be awarded a two years’ deferred dose of high-calorie GM cornfeed and antibiotics, on the condition he sacrifice himself now to the public good and be parcelled up into multiple high-nutrition Jamaican patties, to be packaged and distributed only according to EU guidelines on health and sanitation.

[1] The HICP, or Harmonised

Index of Consumer Prices,

regulations are drafted by the European Commission in conjunction with experts from Member

States and the European Central Bank through an HICP Working Party. The work is overseen and

approved by the Statistical Programme Committee made up of heads of EU National Statistical

Institutes (ONS in the UK) and the head of the European Statistical Office (Eurostat).



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