Why a planned public sector pay freeze means there’s trouble ahead

Given the damage that the Covid crisis has inflicted on the economy and the public finances, and the prospective hit to come from Brexit, it is not so surprising that the chancellor will take the opportunity of the spending review next week to indicate how he will start the long slog towards fiscal health. As the latest figures show, borrowing is at record levels for peacetime, and the national debt is approaching the peaks it hit just after the Second World War (in proportion to national income). Well over £200bn in public money has been expended in protecting jobs and the economy. While interest rates and inflation remain at historic lows, there seems no great urgency to paying down debt; indeed there is not, but the government wants to start to turn  the corner on borrowing and start to reverse the trajectory, circumstances allowing.

The British state spends about £200bn a year employing 5.3 million people, mostly in health and education. The pay bill is thus an obvious candidate whenever a hard pressed government is looking for savings. A Conservative government might also be traditionally expected to bear down on public spending rather than raising taxes. The government has made a manifesto commitment not to increase the rates of income tax, national insurance and VAT, the biggest source of tax revenues, which limits its freedom of movement (though thresholds could be frozen and other adjustments made to increase the tax take). Some promises to increase public pay and recruit more staff were also made, but they are the more politically vulnerable to reversal.  

So the government is briefing about a possible public sector pay freeze. The Covid crisis and the outpouring of support for NHS workers will probably immunise them from any such move, though the actual increase many receive could be token. A full three-year freeze would save some £23bn in total; a 1 per cent cap on pay rises would save £11bn. Many voters would find such in any case minimal or miserly rewards something of an insult for those in frontline roles in the NHS, care homes, the police and the armed services.  

The idea was promoted in a Centre for Policy Studies pamphlet, and has attracted the attention of Rishi Sunak. These arguments in favour are based on “fairness” between the private and public sectors:

– That public sector workers’ jobs, pay and other benefits (eg building up pension pots) were affected much less than those in private companies, such as the leisure, travel and manufacturing

– That public sector pay is still some 7 per cent on average above the private sector – though this is contested by some who argue it is zero, if the nature of the work is taken into account. (Public sector pay has been subjected to freezes or minimal rises for a decade and is 1.5 per cent lower in real terms than a decade ago)

– That the cost of the furlough scheme cannot rest entirely on private enterprise.  

Mr Sunak would thus try to argue the pay freeze as an evening out of the Covid burden. There are, though, a number of problems with such a scheme, especially if it is forecast to last for years:

– Public opinion might sympathise with lower paid public sector workers in particular. They might ask why the government is to spend billions on military space stations but cannot find 2 per cent for, say, squaddies

– The still-powerful public sector unions might take strike action, and be popular in doing so

– Post-Brexit and under the new points immigration system, recruitment might well prove more difficult

– The charge of hypocrisy when set against “chumocracy” bonuses and lucrative contracts would hurt

– The likely slump in the economy would be exacerbated by such a renewed bout of austerity, leaving the public finances actually worse off. This is the factor that carries economic, rather than political or moral, force.

The government’s time-frame for the spending review is exceptionally short – only one year. Yet that is precisely the period when the economy will continue to need support, with the lingering Covid crisis and the potential chaos of Brexit. The traditional four or five year horizon and indeed far beyond would be a better way if framing a fiscal path forwards; but that would clash with the political timetable, signalling the biggest tax increases and public spending cuts just in time for the next general election in 2024. Cutting now takes risks with the economy; cutting later risks the government’s political survival. Either way, there is trouble ahead.