This article was published by the Telegraph on 13th July 2017.
The decision to keep a lid on public sector pay increases was absolutely the right one. Most obviously, the government that introduced a freeze in public sector pay followed by a 1 per cent cap in 2013 had, just a few years earlier, inherited a budget deficit which was on some measures the largest in the G20.
In the immediate aftermath of the financial crisis, public sector pay had also steamed ahead of earnings in the private sector – so much so that, by 2011, it was on average 18 per cent higher.
Does the growing political pressure on the Government to remove the cap mean that things have changed? Yes and no. The disastrous election result has certainly crippled the confidence of Conservative ministers, the gap between public and private sector workers has somewhat diminished, and inflationary pressures are beginning to bite.
But is it time to loosen the purse strings, not only for public sector pay increases but also, perhaps, to allow for the reversing of cuts elsewhere? Not if it means more taxes. The tax burden on households and businesses is already set to climb to its highest level in four decades by 2025.
Unfortunately the Government has locked itself out of one, responsible solution to this bind. The international aid and pensioner benefits budgets, which have recently seen large increases in spending, continue to be protected. The Government therefore appears unlikely to re-gear its priorities such that it can spend more on public sector salaries without increasing taxes or loading more debt onto future generations.
But there is another, perhaps more realistic, way out: to re-examine the case for regional pay. Currently, while there is a London weighting for health staff, for example, there is no difference in public sector pay rates between other regions of England. This is hugely problematic. Plans to regionalise pay were dropped in 2012. There is a strong case for looking at this once again.
Nationalised pay bargaining takes no account of the difference in the cost of living across the country, with house prices being more than 150 per cent higher in the South East compared to the North East. Moreover, rigid rates of public sector pay in areas with a lower cost of living inevitably result in “crowding out”, leading to perverse effects on private sector employment whereby local businesses are simply unable to compete with the comparatively generous salaries on offer from government. And on the flip side, it can damage public services as they struggle to recruit and train staff in higher cost areas.
This is not to say that public sector pay restraint is no longer justified. Even accounting for worker characteristics, public pay is 3 per cent higher than the private sector. This does not even include the generous pension benefits, which make this discrepancy even larger. If it did regionalise pay, the Government should ensure that total increases across the public sector stay within an overall cap of 1 per cent.
Pressure to ease austerity more broadly must also be resisted. The Government’s deficit reduction programme is already very modest, seeking to achieve a budget surplus in 2025-26 that would mean it had been in deficit for a quarter of a century – the longest period since the Second World War.
It is also notable that there is no link between a higher level of austerity and poor economic outcomes. From 2009 to 2015, the UK’s fiscal consolidation programme was slightly larger than the average OECD country. But it was by no means the largest.
Ireland’s fiscal consolidation amounted to around two and a half times the UK’s as a percentage of GDP (the spending and tax components were roughly the same for the UK and Ireland). Yet, Ireland has seen a larger fall in unemployment and has performed better in wage growth than the UK, while doing more to deal with debt. Since 2010, Ireland’s debt to GDP ratio has actually fallen from 86.3 per cent of GDP to just 75.4 per cent of GDP, while the UK’s has risen from 76 per cent of GDP to 89.3 per cent of GDP. This very point was made by the former permanent secretary to the Treasury Sir Nicholas Macpherson a few weeks ago.
Of course, the Government has made errors. The ring-fencing of some departments has led to perverse outcomes, and concentrating on savings in working-age benefits while substantially increasing pensioner benefits is not sustainable in the long run. But abandoning austerity is no solution to the problems facing Britain today.