Pay cuts – ideology not inflation

Gordon Brown last night put the government on a collision course with millions of public sector workers when he called for a three-year pay freeze as part of the fight to control inflation (Guardian, 6th June 2006).

He (Gordon Brown) added that staging pay awards was an “essential part” of controlling inflation…(BBC News 24 website, 6th Sept 2007).

Establishing fixed pay deals over three years with workers such as teachers and nurses would help control inflation… (Gordon Brown, report on 10 Downing St website, 8th Jan 2008).

All very worthy. Also totally untrue.

There’s a fascinating article below from the Financial Times. It shows that the link between public sector pay and inflation is weak. This is because public sector services are (still and just about) free at the point of delivery. There’s no direct mechanism for higher pay for health workers, or higher pay for teachers, to be passed on to the general public in higher charges. There is therefore virtually no impact on inflation – a point acknowledged by most leading economists.

The puzzle of PM’s wage stand

Financial Times Thursday April 3rd

By Chris Giles

Published: April 3 2008 03:39 | Last updated: April 3 2008 03:39

The reaction of economists to Gordon Brown’s continued insistence that public pay restraint is vital to keep inflation low tends to be a collective scratching of heads. The link between public sector pay rises and inflation is generally thought to be weak.

No self-respecting economist would argue that public sector pay does not matter, but they believe that the effect is generally felt in the cost and quality of public services, not in inflation.

The main reason public sector pay is only weakly linked to inflation relates to the financing of public services, which tend to be free at the point of use. Schools, hospitals, the police force, the army and even refuse collection are financed from taxation, not from direct charges to users. So there is no direct mechanism for higher nurses’ pay, for example, to be passed on to higher charges for healthcare services.

In fact, the inflation index is comprised of goods and services that are almost entirely provided by the private sector.

Stephen Nickell, head of Nuffield College, Oxford, told the Financial Times in January that public sector pay rises “have nothing to do with inflation”.

Mr Brown’s emphasis on public sector pay can therefore relate only to indirect effects of public-sector pay, either on private-sector wages or on demand in the economy. But economists are sceptical, since employment in the private sector dwarfs that in the public sector by roughly four to one.

Martin Weale, director of the National Institute of Economic and Social Research said recently: “What I really can’t believe is that, when private sector pay rises are 4 per cent, a rise of 2.5 per cent for the public sector is inflationary.”

Even Mervyn King, governor of the Bank of England, played down the link in his inflation report press conference in February when he was generally stressing the need to combat inflation.

Public sector pay settlements “affect the tone of the labour market as a whole and will have an effect on the likely path of private-sector settlements in due course”, he said.

“But that’s a matter for government. We have never set out to say either for an individual company or a sector what the pay settlements should be or what pay growth should be.”

Gordon Brown obviously knows this. The lies about inflation are just so much fluff to hold down public sector pay.

Why? I would argue that Brown’s reasons are ideological. This is the man who has presided over a widening gulf between rich and poor, who has just abolished the 10p starting rate of tax (plunging the poorest workers in the UK further into poverty), and who has slashed corporation tax yet again – Labour’s third cut to the tax on profits since 1997. And the extra money going into healthcare is about creating opportunities for the private sector to milk the NHS dry.

What we’re seeing is a Government that is hostile to trade unions, and that represents the rich rather than ordinary workers. Civil servants and teachers are set to strike against public sector pay cuts on 24th April. They’re absolutely right to do so. This is an example that health unions should unite in following.

One piece of good news – informal feedback from Unison colleagues suggests a sporting chance that Unison lay activists will reject the pay cuts being so enthusiastically pushed by their leadership. If they do, this will pose a major challenge to Brown’s attempts to slash pay for over a million health workers.

Nick Holden from the Unison Health Service Group Executive has produced a report from their meeting on Sunday on his blog. It shows that the Unison leadership who negotiated the three year deal are not having it all their own way.

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