A quick drink with Peter Warburton of Halkin Services and the shadow MPC last night. He pointed to one of the more unexpected results of the beginnings of austerity in the UK: rising public sector productivity.
The Office for Budget Responsibility’s July 2010 projections were for headcount reductions across the public sector of 60,000 by the end of March 2012 and 490,000 by the end of March 2015. In fact, things have moved rather faster: the public sector payroll had fallen by about 350,000 (or 284,000 full-time equivalents) by the end of 2011. Public sector output, says Warburton, is fraught with measurement problems but, “in so far as the data is consistent”, we can see an upward trend in productivity, presumably as a result.
“The implied rate of growth of output per full-time equivalent in public sector services (excluding financial services) has soared to almost 7%”, nicely outstripping that of manufacturing industries. Given that it fell by 3.2% between 1997 and 2007 during the Brown binge (a time during which private sector productivity rose by nearly 30%), and then by another 0.8% in 2008 alone, that’s got to be good news.
The other obvious point that came up was inflation. Peter expects regular highish inflation for many years with a tail risk that it flips into hyperinflation. The worry for him is that the core political assumption of the West – that the government budget should generally balance over a seven to ten-year period, something that allows monetary policy to be used to control inflation – might be breaking down. If “monetary policy is thrown into crisis… inflation is unshackled.”
It isn’t entirely clear how inflation appears, but as he put it in a recent letter, “when monetary policy is subverted to the financing of the budget deficit in order to preserve the creditworthiness of the sovereign, then the price level will somehow adjust to limit the government’s claims on real resources in the economy”.
Finally we talked about quantitative easing (QE). Peter thinks there will be more, but that in yet another attempt to get the commercial banks to lend, it will be extended from gilts to the corporate bond market. That might make being in corporate bond funds, and in particular those heavily exposed to UK bank debt, make sense. We’ve mentioned this as a possibility here before, but it is clearly something worth keeping an eye on.
Peter is currently in Edinburgh along with Russell Napier and Andrew Smithers to teach A Practical History of Financial Markets, a course everyone really serious about markets should think about going on at some point (I’ve done it, and I still refer to the materials from it regularly).