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Sunday, 27 November 2011

Strike one to the Unions?

Both sides of the fence when it comes to Wednesday's proposed strike action by almost 2 million public sector employees are relying on the public not to understand the quite complex nuance of their positions. Both sides of the fence are using misinformation to get the public onboard (Ed Balls on Andrew Marr this morning using a teaching assistant on £15,000 as an example for instance when the fact is that those on £15,000 and under aren't affected by the changes) . Trouble is, as with many political issues, both sides are right. And both are wrong. To understand this you have to understand the role and responsibility  of unions and the role and responsibility of government, and how they are clashing so seriously.

First, I think it's important to explain why the strike is taking place. Please imagine yourself in the situation of a teacher. Central to your financial planning over the years you have worked has been the safety of your pension entitlement.
  • You are being told that you will have to wait until you are 68 (currently 60 for teachers) to take that pension. 
  • You are being told you must contribute 50% more each month into your pension than you were already contributing (9% of salary instead of 6%). 
  • You are being told that your pension payments will rise by inflation calculated under the far more anaemic CPI measurement instead of the RPI measurement (bear in mind the government, when it loans out money, expects payments back to it to go up by RPI). 
  • You are being told that instead of being calculated as a percentage of your final salary (likely to be pretty high) it will be calculated over a career average salary (so much lower). 
  • Furthermore, if you are a teacher in a private school you are being told that you are being removed from the teachers' pension scheme altogether, even though you were trained by the public sector and in a normal career ay switch from one to another.
So, just to clarify, striking workers are being told they will have to pay more to receive less and work longer to receive it. A triple whammy if there ever was one.

Now let's look at the government's position:
  • The national debt - which is how much we owe to our creditors, is approaching one trillion pounds. That's 1 followed by 12 zeros, or £1,000,000,000,000. Just to cut this down - it is about £15,000 for every man woman and child in Britain, and about £35,000 per employed person in Britain. We ARE going to have to pay this back at some point. 
  • The budget deficit - this is the difference between what the government receives in tax revenue and how much they are spending each year. This year it is projected to be somewhere in the region of £168 billion pounds. That's 168 followed by 9 zeroes, or £168,000,000,000. This amount is added to the national debt every year as the shortfall has to be made up by borrowing. 
  • This means that we as a country are paying debt INTEREST (the money it costs just to service the debt - not even pay it back) of £130 million pounds A DAY.  That's about £50 billion a year in interest payments. This is about £2,000 a year for each UK household just on interest payments. That's more than the entire education budget for the UK being just the cost of the debt we have.
The Coalition government has decided to try and get the budget deficit down to zero by 2015 - although it may now take until 2017 - and that deficit reduction plan has been endorsed by the markets to the extent that the UK now can borrow money at a cheaper interest rate than it has for the last 50 years whilst the likes of Greece and Spain are near default and having to impose drastic austerity measures the likes of which would make even the most committed of deficit hawks shudder. BUT the price of doing this is that many parts of the economy are having tocontribute to deficit reduction - and the pension proposals above are how teachers and other public sector workers are being asked to do that.

The government asked Lord John Hutton (a former Labour secretary of state for work and pensions) to look into the cost of pensions after the independent Office for budgetary responsibility (OBR) suggested the gap between public sector pension contributions and payments would double over the next four years to £9bn. Many of the government proposals you see above are drawn from the report that Lord Hutton produced.

Spokespeople for the teachers' unions make the following points.

1) The teachers' pension scheme at the moment pays for itself - in that under an agreement made with the previous government it is affordable and viable in the long term.

2) The changes mean, for instance, that on a modest teachers' pension of £10,000 an annum a teacher would lose abot £50,000 over the next 20 years

3) The public sector workers didn't cause the financial crisis, so why should they have to pay for it?

The government has come back with the following points:

1) They dispute these figures and argue that at some point unless these changes take place the teachers pension scheme will not be affordable. After all - when the pension age was created life expectancy was only 18 months past it - now it is around 20 years past it, and getting higher - and something's got to give.

2) The government argue that whilst they accept this will affect many key workers badly, it is correcting the gap between public sector pensions and private sector pensions where the taxpayer is funding too high of a percentage of a liability that is growing.

3) That the financial crisis was caused by the debts built up by the previous government.

The Unions' point 3 is related to the oft-repeated conceit that the debt was caused by 'the bankers'. Whilst there is little doubt the RECESSION was triggered by problems with the financial services, it came after a sustained period of growth during which a responsible government should have built up a budget SURPLUS - but as we know we went into the recession with a massive structural budget deficit (meaning it cannot be explained purely by the economic cycle of growth and recession). The spending that came after that - some of which was very neccessary - worsened the debt to where we are now. Many of those who will be marching in the rallies on Wednesday are in their jobs funded by the unsustainable debt the previous government took on. I have pointed out in many previous articles that this spending was partly neccessary, but models of voting behaviour suggest that a Labour government might increase the size of the public sector to deliberately raise the number of workers naturally inclined to vote for them. Fact is that if you take on an unsustainable mortgage to buy a house you can't afford, at some point you may have to sell that house and trade down. Do we blame the bank for making us do that or accept that we have to take responsibility for taking on those debts? This is the reality the country faces.

Furthermore, let's say it is all about bankers. What do we do then? If we taxed all the bank bonuses paid ou in the UK last year at 100% (in which case they wouldn't be paid so it's a moot point) that would bring in about £8bn. That leaves £160bn to find from raising tax revenue or cutting spending. Any solutions?

Then there is tax avoidance. Conservative estimates say this is about £20bn - the "Tax Justice network" say it is about £70bn. Let's use that figure then. That leaves £90bn to find just to get rid of the deficit and we haven't even started paying back the debt!

A question that has been in my head this weekend as I played with my young children is - what am I going to tell them if we don't deal with the debt now and in 30 years time the UK's debt is £2 trillion, IMF bailouts are required and massive austerity measures are in place? That even though I benefitted from the prosperity of the boom years, when the bust came and the finger pointed at me I shook my head and said "not my fault"?

The changes DO affect teachers in a serious way, and given the government is a monopsony employer (it has dominant market power) the unions are doing what they are set up to do, which is representing what they feel to be the best interests of their members. The trouble is that trades unions represent sectional interests - the interests of their members, however hard they try to argue they represent a cause (i.e. their action is in the vest interests of the education of this country's young people).

Those interests may clash with what is in the best interests of the country. If you believe that everybody has to contribute their bit to bring down the debt then one could argue the teachers should take their medicine and get on with it. Should you believe that they shouldn't be asked to pay to help reduce the debt then one can argue that they should all be out on the streets striking.

Freedom of Association is one of the most important freedoms we have in our liberal democracy. Members of unions have a right to strike  as long as they have been balloted correctly - which they have - regardless of the anaemic turnout for those ballots. We should celebrate the fact that we can have these debates and workers can take these actions (within reason). In many countries, unions are banned. You'll know those countries - they are where the people are denied most if not all other freedoms.

I have a feeling the government may relent on the removal of the TPS from private school teachers and possibly the change from RPI to CPI. Possibly they'll make the additional pension contributions more progressive (e.g. only for those on much higher wages). But as I've said before, the raising of the retirement age should have happened a long time ago, and we can't really be protesting about the advances in medicine and life expectancy can we? Any changes in the teachers' favour will be seen (rightly) as vindication for Wednesday's industrial action. Or maybe they won't change anything, and we are on the cusp of a series of general strikes.

The polls at the weekend show the public are split on this. Whether they will be by next weekend remains to be seen.

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