The government’s position on public sector pay – at least if anonymous briefings to the broadcaster Robert Peston and others are to be taken at face value – shows evidence either of poor economics or a risky political calculation, as ministers confront industrial disputes with railway workers, nurses and teachers.
One part of the poor economics is a claim that the government has “run out of money”. The other is that if it gave in, higher pay would fuel inflation, and that would make us all poorer. Little of this makes much sense.
The government has not “run out of money”. It could fund more generous public sector pay deals out of higher taxes; or it could cut public services, in other words paying workers more generously but employing fewer of them. It doesn’t want to do either of these because Tory MPs are ideologically ill-disposed to higher taxes and might not support them. And explicit cuts to already embattled public services would be politically unpopular.
It is not strictly true either that more generous public sector pay would fuel inflation. If this were funded by higher taxes, demand in the economy would be no higher. Even if the government chose to fund public sector pay increases out of borrowing, which it could do, albeit only temporarily, the Bank of England would respond with higher interest rates to choke off higher inflation. Moreover, if an inflationary impulse were tolerated it would not necessarily impoverish us, because money wages tend to keep up with inflation when responding to events like this.
Rishi Sunak’s government is dredging up another canard from his campaign which is, roughly: “If only we had kept a lid on inflation, the cost of living would not have risen and we would not be poorer.”
The real problem we are facing is that the literal cost of living – the cost of food and energy and the things we need to sustain life – has gone up relative to the cost of everything else, most importantly what we get back from selling our labour, thanks mainly to Vladimir Putin’s invasion of Ukraine. (It has been aggravated by disruptions to supply chains caused by the aftermath of Covid, the ongoing epidemic in China and, in the case of the UK, trade frictions caused by Brexit.) Inflation was our chosen solution, not the problem. It was the least painful way for an unavoidable lowering in the real standard of living to happen, the alternative being a large recession to drive down wages in money terms.
The correct and honest way to think about public sector pay if you are in government is to start from the amount and quality of public services you want – or have promised – to deliver. That plan in turn is going to be bound up with what taxes you think you can defend and the economy can sustain. You then pay what the labour market requires you to pay to recruit and retain the workers you need to run those public services.
The government no doubt hopes it can either squeeze public sector workers, getting the same services for less, degrade services in a less visible way, and profit from the conflict caused by trying to, or some combination of all three.
This strategy, dubious even on political grounds, is economically short-sighted. One consequence of the NHS crisis seems to be a large fall in labour supply due to ill health, probably caused by a combination of long Covid and conditions normally treated promptly being aggravated by long waiting lists. A record 2.5 million people say they are out of work due to long-term sickness now. Addressing this problem – meaning at a minimum paying wages adequate to fill vacancies and reduce turnover – could well more than pay for itself in terms of increased labour supply and the resulting tax revenues, aside from helping to alleviate a lot of suffering.
[See also: Keir Starmer interview: “Am I aiming to be just a one-term prime minister? No, of course not”]
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