Why is pay restraint being imposed on the public sector? Inflation and interest rates are not at risk and the economy is in fine fettle.
It’s bad enough, if you’re a low-paid nurse, rail worker, prison officer, post office worker, or policeman, having to take a real terms pay cut this year when City bosses are paying themselves an average of 37% in pay increases, taking them to more than £55,000 a week, walking off in two days with what it takes you a year to earn. But why is pay restraint being imposed on the public sector in the first place?
Gordon Brown says he wants to do nothing that puts the control of inflation, low interest rates and a stable economy at risk. Hard to disagree with that. But none of these is at risk.
Consumer price inflation (CPI) dropped last month to just 1.9%, its lowest level for 18 months and below the government’s target rate for inflation. Average earnings growth also actually fell in the year to June (the latest available information) to 3.3%, the lowest figure for more than four years.
The Bank of England’s monetary policy committee had feared at the start of the year that an inflationary pay-price spiral might develop from rising world oil and gas prices, tightness in the labour market, and the impact of CPI outturns on inflation expectations. None of these, however, has materialised. We have seen instead lower domestic gas and electricity prices, slack in the labour markets because of high levels of immigration and more older people and women returning to work, and CPI inflation almost halving (down from 3.1% in March) over the last four months. So where is the big deal over public sector pay cuts?
Of course it’s true that the government is planning to rein in public spending, after seven years of unprecedented increases, particularly on health and education, and this will form the centrepiece of the comprehensive spending review expected next month. But that is best achieved by requiring government departments and public service managers to contain expenditure increases within lower targets, no more than the overall growth rate of the economy, and allowing them through zero sum budgeting and other similar techniques to decide the optimal means to slow their budget spending – not by pre-empting their choices through central imposition of a pay cut on the lowest paid.
Even if that were not so, it is important not to run away with any idea that public spending is somehow careering out of control and that public service workers should be curbed because of their excesses. In fact, even after the run of spectacular increases of the last seven years, public spending’s share of GDP last year was still (at 41.7%) well below its level in the Tory mid-1990s, when it varied throughout 1991-5 between 42.4% and 44.3%. Moreover, spending overruns in recent years in, for example, the NHS were not accounted for by nurses, porters, cleaners or junior medical staff, but by very large consultant and GP pay awards and PFI excesses. Why punish the lowest paid when they are not responsible and never had any of the spoils in the first place?
It is true that interest rates remain high, with the official Bank rate at 5.75% and likely to rise to 6% towards the end of this year, but this was largely aimed at damping down excessive asset inflation, particularly due to the lack of affordable housing supply (neglected by government policy for two decades) to meet rising demand throughout the south-east. What is needed now to deal with this problem is a radical change in government housing policy, of which there are some welcome signs, not pay restraint in the public sector, which is neither the cause nor even a symptom of the real underlying problem.
And as for not putting a stable economy at risk, – Gordon Brown’s third point – it isn’t at risk. It’s in fine fettle. Growth is strong, inflation falling, employment rising, and the National Institute Economic Review notes in its latest report: “Currently there seems to be little inflationary pressure from the labour market.”
So, is the case made out for pay cuts for the lowest paid public sector workers? Time to think again, Gordon.