Political Economy

Despite the protestations of the coalition government it is clear that they are not prepared to do anything substantive to help the North’s economy. A recent report showed that of a £5bn transport program some 80% was to be spent in the south and only 6% in the north. Recently the government announced an extra £1bn that has to do for all the regions of England!

A recent report in the Financial Times  (London widens gap with the regions, 4/1/12) shows just how far-gone things are and also shows why the continuing subsidies to Scotland  are at the expense of the northern English. Expenditures under the Barnett formula are:

At the same time data shows that Scotland is in the same league for wealth per head (measured in gross value added or GVA) as parts of the south.

Scotland is in fact a third wealthier per head than Wales and nearly 29% wealthier than the North East of England. Why does Scotland get  £8.3bn more than English regions with similar populations, all of whom are poorer than Scotland, when it is neither fair nor economically astute?

Scotland, Wales and Northern Ireland together get £15.8bn more than England. Would it not be fairer to allocate this excess between the regions on the basis of GVA and population leaving something over to use for the particularly bad spots that occur in each of the four nations?

If you allocate £24.42 per percentage point that the GVA per head is below the national average  then you get a much fairer distribution per head with Wales getting the most at £635 a head, Northern Ireland  next at £586, the North East £562 down to Scotland at £24 per head. Multiplying these figures by the population then gives a new, fair, and economically justified way of distributing the £15.8bn excess. The final figures are as follows:

The first point to note is that there is now an excess £1,386mn left over that can be allocated to poverty ‘hot spots’. There is no reason why less could not be allocated per point, say £22.00 per point, instead of £24.42 and more allocated to the hot spots. . If this is done in a transparent manner using criteria that can be understood by the public and using proper project management techniques to plan and monitor the expenditure against predetermined goals, then there is no reason why the regional inhabitant should object to getting less cash up-front.

The second point to note is that the English regions are allocated the funds on a fair basis. The £11.3 bn that is now allocated to England is done because of relative poverty levels and will do more to generate growth, jobs and wealth for all four nations than the current Barnett formula cash allocations has ever done.

Certainly giving Scotland, the third wealthiest region in the UK, £8.3bn more than much poorer regions is an offense to decency and democracy.

It’s a no brainer and here’s why.

Risk

The only risk that public sector pensions face is that they will become so large that the taxpayer will be unable to afford to pay them and as a result seek to reduce them to a reasonable level.

If you have a private sector defined benefits pension (one that pays on on the basis of the number of years you have worked) then you face the risk that your company will go into liquidation leaving you high and dry. At this point the Pension Protection fund will come into play. If you are already in receipt of a pension this will get 100% protection. If you are not only 90% of the pension payable will be protected.

All of this only applies if the scheme has sufficient assets to secure benefits on wind up that are at least equal to the compensation that the Pension Protection Fund would pay if it assumed responsibility for the scheme. Most schemes will not. Many will only have sufficient assets to pay 50% or 60% of the pension.

If you are in a defined contribution scheme then your pension will depend on how much you and your employer paid in to it, how much the fund increased in value over the period you were in it and the interest rate on the annuity you buy to pay your pension. So if your fund returns 5% per annum over 30 years, instead of the 7% you had expected, your pension fund (and your pension) will be only half of what you expected. If the annuity that you buy to pay your pension gives a lower return than the return you had anticipated when you where doing your planning then your pension will fall even further. This could quite easily mean a pension of only 40% of what you had planned for.

In fact according to IFAOnline.co.uk funds have returned 3.2% over the 10 years to 2009 and over the past few years annuity rates have dropped from around 6.5% to 4.5% reflecting big pension losses to private sector workers.

Public Sector +1          Private Sector -2

How Much Pension?

The Belfast telegraph reported on the 30th November 2011 that to get the £30,000 pension  (and, incidentally, the £90,000 tax free lump sum) of a headteacher a private individual would require a fund worth £1,200,000! In effect the taxpayer has made that headteacher a millionaire.

To get a public sector pension of £7,800 a private sector worker would need a fund of £340,000. Saving a sum like this, even with an employer contribution, is beyond the means of most workers in the private sector.

These pension fund equivalents represent a huge wealth transfer from the private sector taxpayer, many of whom will not have a workplace pension, to the public sector worker via the tax system.

The average pension of the 3.2 million private sector workers and the 5.4 million public sector workers on defined benefit pensions is approximately the same, £5,800 versus £5,600 a year. The 6.2 million private sector workers on a personal pension will get an average pension of £1100 according to the BBC Look East programme.

Public Sector   +2   Private Sector    +1

How Much Pay?

It used to be that the public sector got paid much less than the private sector. This is no longer  true. The latest figures show that on average the public sector gets £300 a year more than the private sector. However this excludes the pension bonus. Of course public sector unions like to point to the very high salaries earned by much less than 1% of the private sector and in comparison point to the pensions earned by low paid, possibly part-time, public sector workers with possibly few years of service. They do not compare with the equivalent private sector worker who has no pension but whose taxes pay for their private sector neighbour’s pension.

Public Sector 0               Private Sector  0

Who contributes?

Price Waterhouse Coopers recently published a report that showed that a private sector employee would have to contribute between 15% and 40% of their pay each year to get the same pension as a public sector employee. My own research using pension calculators on the Internet indicated that total contributions of employee and employer would have to be between 24% and 39% per year depending on the assumptions made. A reasonable average of this is around 30%. Deduct the 6.4% that the average public sector worker currently pays, before the 3% increase, and you get an average of 23.6% of salary that is contributed by the taxpayer. Adding in the proposed 3% increase that the public sector employee will pay means that the taxpayer pays 20.6%.

To be fair to the public sector they constitute around 6 million people compared to total employment of 29 million or 21% of the total. Hence we can assume that the public sector worker pays 21% of the taxpayer contribution and the private sector pays 79%.  Of the 20.6% taxpayer contribution 16.3% then is paid by the private sector worker.

This means that the teacher or nurse on £28,000 is getting an annual bonus to their salary from the private sector taxpayer of £4,500 per year. Yet more than half of those private sector workers earn less than £28,000. The head teacher on £70,00 gets an annual boost of £11,400. this is equivalent to a year’s work on minimum pay.

Public Sector +1      Private Sector   -1

The Result

Everyone who contributes to a pension gets tax relief, the only fair element in the whole situation. So whose pension would you prefer?

Public Sector    +4     Private Sector     -2

It’s a no brainer isn’t it!