UK's public sector is a parasitic monster

By Simon Denham, Head of Capital Spreads

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Markets look to be coming in on the weak side this morning, which is disappointing after late activity on Friday gave hope that a base had been reached.

The problem has not so much been any particular new piece of information on the UK economy but from the almost universally gloomy statements from the meeting of the 'great and the good' at the G7 Finance ministers get together. Forgive me for being a little dense but didn't they all have time for a chat at the Davos pow wow a couple of weeks ago?

Whilst the rest of the world fears a serious slow down, 'Captain Darling' can be heard propounding the almost ludicrous theory that the UK is safe from any global influence - this is the same country that has the huge, and growing, public sector and trade deficits, a manufacturing base of just 13pc of total output and a financial sector (on which the rest of the economy clings on like limpets) that is being dealt a series of hefty blows from Credit Crunch to Non Dom tax hikes!

As has been mentioned many times in press and analysts' publications, one of the main problems is the huge parasitic organism that the public sector has become.

Whilst a robust state sector is a desirable asset for any nation, the UK model has become a monster of ridiculous proportions.

Private sector productivity has gone up year after year in an unbroken chain for many decades but, the public sector has actually fallen over the last ten years - not just last year or the year before, but for ten whole years.

This must make the change in output of the average public sector worker (on a cumulative basis) over 50pc lower than his counterpart in the private sector.

Unfortunately, whereas in the private sector a situation like this would call for cuts to survive, the one thing we can be sure of is that "the axe man will never cometh" as far as the Government is concerned.

When any problems are experienced, another billion is thrown at it. Gordon Brown, for all of his reputed intelligence has never had to earn a living in the cut and thrust of the private sector, where a wrong decision can mean ruin or unemployment.

Watching the public sector hand out massively paid 'non jobs' on an almost continual basis, has been a frustrating experience for those running tightly controlled businesses, see 30pc of this profits swiped in a sort of legalised highway robbery called corporation tax and then, if they want to pay a dividend with what is left, watching the same government tax that same profit once again (making the cumulative tax on distributed profits over 50%).

Unfortunately with the dire global situation as it is, we have probably missed our chance to prune, as adding a further braking impulse would almost certainly send the economy into a very serious contraction.

Turning to today's markets, we are calling for the FTSE to come in around 45 lower at 5739-5740, as we react to the falls in the Far East earlier and the weakness in the US on Friday night.

Punters are very much two way in outlook, with buyers virtually matching sellers on our books in almost all major indices (Dow, S&P, Dax, FTSE and Nikkei). This is not to say there is little interest either, as we have more open positions over the weekend than at any time since the start of the year.

There is heavy support in the FTSE between 5690 and 5705 and we bounced four times from here on Thursday and Friday and proved solid in the last week of January as well.

If we go for the downside from the open today, then this may well give a pause to the bears. On the upside bulls will be hoping that we can close above 5820, which has proved something of a 'cusp' point for the last three weeks.

Sterling, having consolidated the falls of Thursday, is now probing the downside once more with the Euro cross threatening the 0.75 level again and is 30 pips higher at 0.7486-0.7488. GBP/JPY is also sloping to the downside after recovering slightly from the huge post-Christmas falls.

The trend is beginning to look bearish once more, and the cross is some 80 pips off at 208.08-208.16. Support is at 208.00, 207.40 and then 205.90. With the Bank of England continuing to worry about inflation, the prop of high rates is likely to remain for some time but it is beginning to look a trifle worm eaten.

And finally Gold is some 4 bucks up today as dealers ignore the Central Bankers agreement to permit the possible offloading of some $92 billion of IMF gold reserves. Bulls are, as ever, in command and we are probing the mid $920's resistance levels at 922.9-923.4.

 Have your say    

Very good article and comments, I thought it was just me. Like our seas they wont stop until there are no fish left.

They take the moral high ground as well,they say I should have, "I have got a degree" This must have attitude makes them think they have a right to my substance. Im off to keep a few chickens grow some vedge in Bulgaria. Anything but pounds in Switzerland gold later in a box not a bank for me.

I have had enough of their worthey causes, finger wagging, sanctimonious expensive claptrap. Soon we will see that human rights wont put food on the table and your worth what you can get. But what do I know I am only a chippie
Posted by MK.Fowler on February 11, 2008 4:13 PM
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dr death on February 11, 2008 11:59 AM

"made housing and schools unaffordable for the rest of us. With knock-on disastrous social effects in urban areas."

What schools - Eton and Harrow? Most of the plebs (the rest of us) send their kids to state schools.


Posted by Morvan on February 11, 2008 3:44 PM
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Finally... Someone in the UK who isn't a raving socialist. Government spending needs to be trimmed by two thirds. Period. The whole idea that the Government has a right to confiscate personal property via taxation needs to be revisited. It is a tyranny on responsible working men.

Capitalism is a meritocratic, moral system whereby you succeed or fail based on your usefulness to the rest of society. You get rewarded for making or doing things that other people want. In socialism this does not necessarily happen and hard-working, responsible people get punished at the expense of workshy layabouts, public sector paper pushers and special interests, like central bankers, corporations and lobbyists.

The Marxist socialist model failed, the Keynsian socialist Model is failing, it's time the world listened to Von Mises as it should have done 50 years ago. Oh and we should repeal legal tender laws to allow for a gold-backed currency to compete with the pound.
Posted by Patrick Mockridge on February 11, 2008 12:36 PM
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Screw Britain come with us to Dubai,incorporate there and manufacture in Singapore,exporting to shopping mall Blighty.Some such formula of this is at work now and what seemed an effective way of taking the unions to task,is all too effective in destroying the econonomy.Its the economy stupid!
Posted by Marie dosSantios on February 11, 2008 12:34 PM
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Could have easily headlined this "UK's financial sector is a parasitic monster"

After all, the boom of the last 10 years has concentrated wealth in this sector and made housing and
schools unaffordable for the rest of us. With knock-on disastrous social effects in urban areas.

Cheers
Posted by dr death on February 11, 2008 11:59 AM
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Of much more concern should be the Public Sector Pension liabilities being built up - I'm not sure how these will be paid when the time comes. Private sector companies running similar final salary schemes have to maintain funds at certain levels - and are subject to market swings. Which is why so many Final Salary schemes have been closed. There are no such funds (at all) held by Government, it all comes out of money in hand (or borowings they hope!). But perhaps the people who currently purchase UK Gilts may not be so willing to risk their money on the Banana Republic we are rapidly becoming. I think that if I were dependent upon a Public Sector Pension due to come good in say - 20 years time - this would worry me deeply. I'm not clear where the money will all come from. But then Mr Brown & Darling will be long gone by then - so they don't really have to worry about it do they??
Posted by IanT on February 11, 2008 11:27 AM
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Perhaps David RE Feb 11th 10.05am
can reveal which uniquely efficient part of the public sector he works in.

That way his bit might survive the cull which must hit the rest of his underworked over pentioned colleagues!
Posted by M.T.Murphy on February 11, 2008 11:21 AM
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I am sure that, like me, many employers are on the point of chucking the towel in.

Rather than see the profits of years of hard work simply lifted out of our bank by the insatiable public sector, it is time to chop hard and deep and close all underperforming factories. There is absolutely no point in trying to nurse them through the downturn because the business rates will continue to drain us of hard-earned cash.

Perhaps Mr Brown hasn't quite worked out how he will support a massive increase in unemployment when the income side of his revenue account is falling.
Posted by MikeS on February 11, 2008 10:54 AM
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Perhaps you would like to quote the source of your figures on public sector productivity. Not all areas are inefficient. The sector with which I'm familiar has seen enormous productivity gains with falling real salaries over 10 -20 years. Not all the public sector is bad value. On the other hand, management is often ineffective, so the level of service could improve further.
Posted by David on February 11, 2008 10:05 AM
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