Outlook: Public pay runs out of control as private sector languishes

Water prices; Pension prattle

Basingstoke and Deane, which claims to be "breaking the mould of local government", is looking for a corporate director to help establish the council's "strategic direction" on a salary of £73,400 plus benefits. Camden Council in London wants a new head of equalities and social inclusion: salary £60,000, plus benefits. Surrey and Sussex Strategic Health Authority is paying up to £45,701 for a workforce planning manager. And Oldham Primary Care Trust is willing to pay up to £34,103 for a positive health action facilitator.

Basingstoke and Deane, which claims to be "breaking the mould of local government", is looking for a corporate director to help establish the council's "strategic direction" on a salary of £73,400 plus benefits. Camden Council in London wants a new head of equalities and social inclusion: salary £60,000, plus benefits. Surrey and Sussex Strategic Health Authority is paying up to £45,701 for a workforce planning manager. And Oldham Primary Care Trust is willing to pay up to £34,103 for a positive health action facilitator.

These positions, plucked at random from the ad fest of public sector vacancies published in this week's monstrous, 104-page Society Guardian, go some way to explaining yesterday's news that public sector wage inflation is racing away at twice the level of the private sector.

Having been forced to wear the hair shirt throughout most of the 1990s, the public sector is letting rip as never before. To some, it seems completely out of control. The door stopper of an advertising supplement published every Wednesday in The Guardian does nothing to allay those fears. As the Government turns the spending taps to full on, jobs are being created like topsy, many of them on salaries and perks that most private sector firms couldn't and wouldn't match, still less justify.

The raw data - assuming the Office for National Statistics hasn't cocked it up again - tell it all. While pay growth in the private sector has plateaued at the same level as retail price inflation - 2.9 per cent - public sector pay is continuing to accelerate, up 5.6 per cent in the year to August against 5.1 per cent in July. The gap between public and private sector wage inflation is now higher than at any time since November 1992.

Pay growth in the public sector has been rising for more than a year now, yet because the public sector takes ages to respond to the disciplines of the money markets, the Bank of England would struggle to reverse the trend through higher interest rates. Tighter policy would further damage the private sector without necessarily addressing the problem of public sector largesse.

Taken in conjunction with recent figures compiled by the BBC which show that after taking account of pension benefits average pay in the public sector is now higher than the private, the latest numbers should set alarm bells ringing.

I've been instructed by a number of readers that this column's repeated assertion that the public sector creates no wealth is economically illiterate. Yet it is certainly the case that public employment doesn't generate any net tax revenue, as tax paid by public sector employees just goes round in a circle. The logical thing to do would be to pay public sector workers net, but then that might do some of them out of a job.

In any case, Britain seems fast to be approaching the upside down world of a rich and privileged public sector supported by an enslaved and increasingly impoverished private sector. This is plainly unsustainable but, perhaps unfortunately, the unsustainable can be sustained for an awfully long time before it becomes unsustained. Of course one reason why public sector pay may have overtaken the private sector is that so many low paid jobs have been exported to the private sector through outsourcing.

Public sector wages still compare quite poorly against the private sector for similar, senior management and leadership positions, which is one of the reasons why government pay growth is racing away. With the labour market still tight, the Government is forced in its attempt to improve public services to pay competitive salaries. Pay peanuts and you get monkeys. None the less, the latest earnings figures will only deepen the suspicion that higher taxes and spending are being blown on uneconomic job creation and higher pay, rather than genuinely improving public services.

Water prices

Everyone seems to have taken something out of the privatised water companies of England and Wales since they were privatised 14 years ago. Investors have had their money back many times over, customers have enjoyed reduced bills, at least for the past three years, and spending on cleaner water has risen by an order of magnitude. For how much longer can this virtuous circle continue? Until the end of the current pricing regime in April 2005 seems to be about the sum of it, at which point it's pay back time.

Philip Fletcher, director-general of Ofwat, the water regulator, yesterday warned customers that they should expect "hefty increases" in bills over the subsequent five years. The water companies have asked for an average increase of 30 per cent at today's prices over the full five-year term. In some cases the increases demanded are much larger, for instance at United Utilities, which wants to push charges up by a full 71 per cent in real terms for the North-west. Mr Fletcher won't give them all they want, but he's already conceding that they will get most of it.

Nearly all the low hanging fruit of efficiency gain has already been plucked, making it much harder from here on in for water companies to pay for improvements and lower bills out of cost savings. The City has also gone as far as it dares in reducing the cost of capital by debt financing the water companies - too far in some cases, where fresh equity is required to ensure that public service obligations are met.

Both the City and the regulator have had their pound of flesh and what's left is a hollowed out husk of an industry, barely capable of servicing its capital and spending obligations. Regulators that allow utility prices to rise are accused of feeding the fat cats of the City and the boardroom, yet in this case it appears that Mr Fletcher has little option. With the benefit of hindsight, it appears that the pricing regime imposed by Mr Fletcher's predecessor, Sir Ian Byatt, was too brutal. Regulators may also have been too lenient in allowing the degree of equity withdrawal the City has indulged in.

It's too late now. Still, just to get this in proportion, at an individual customer level the sums involved are not substantial. What the water companies are proposing for the five-year period equates to less than it would cost to buy a bottle of mineral water a week.

Pension prattle

Delighted to be here ... blah ... Paul Myners ... blah ... City short termism ... blah ... long-term investment ... blah ... mismatch in communication and understanding ... blah ... bad for the economy ... blah ... contentious territory of transaction costs ... blah ... minimum funding requirement ... blah ... trustees must try harder ... blah, blah, blah, yawn. It's hard to conceive of a more irrelevant speech on the supposed failings of Britain's pensions industry than the one delivered last night by Ruth Kelly, Financial Secretary at the Treasury, to the Universities Superannuation Scheme annual awards.

While Britain's system of privately funded pensions, once the envy of the world, goes to hell in a handcart, Ms Kelly whittles on about "whether there is something inherently short-termist about the workings of the City" - a rhetorical question presumably, because you didn't need to listen to the speech to know what the answer would be. Talk about fiddling while Rome burns.

Few markets work perfectly, but it beggars belief that the Government thinks it has something to contribute on the way the City invests pensioners' money, or even that such meddling should be a policy priority, when it raped the industry by removing the tax credit on dividends, thus deepening the deficits that threaten so many final-salary schemes, and has singularly failed to address the key issue affecting pensions, which is how to persuade people to start saving for their old age again. City short termism? Give us a break.

jeremy.warner@independent.co.uk