Why Boris Johnson Flipped From Promising A “High Wage Economy” To Urging Pay Restraint
Boris Johnson's pledge to create a "high wage" economy have failed to materialise so far (Alamy)
Boris Johnson pledged to create “a high-wage, high-skill economy” at Conservative Party conference just eight months ago, but now that unions are asking for higher pay, the Prime Minister is urging restraint.
This week thousands of rail workers are on strike as a result, while teachers and doctors are threatening industrial action of their own as part of a “summer of discontent”.
Ministers are not only refusing to meet their demands, but Chief Secretary to the Treasury Simon Clarke has gone as far as saying most public sector workers should expect a real-terms cut this year.
Boris Johnson’s official spokesperson has also admitted that the “high-wage” economy pledge remains more of an objective, given the “short- to medium-term inflationary pressures”.
Recent forecasts show inflation is expected to reach 11 per cent later this year. Clarke has warned that a pay rise to match that would “risk a repeat of the 1970s”, where the economy was badly damaged by long-term price increases.
This was echoed at this morning’s Cabinet meeting, where “the Prime Minister, Chancellor and Chief Secretary to the Treasury led a discussion on the importance of fiscal discipline”, according to Downing Street.
Johnson “said the public would expect the government to stick within their means at a time of global cost of living pressures”, according to a Downing Street spokesperson.
Rishi Sunak “emphasised that the government had responsibility to not take any action that would feed into inflationary pressures or reduce the government’s ability to lower taxes in the future”.
The government has been suggesting for months that paying 15 million public sector workers in line with inflation will only cause prices to go up further, citing the economic principle known as the “wage/inflation spiral”.
An academic concept dating back to the 1970s, it suggests once households expect inflation to stay high, they will keep demanding higher wages. It is believed that this, in turn, will force businesses to pass on the cost to consumers, which will mean inflation keeps rising due to rising prices.
Trade unions have criticised the concept as a myth used by right wing figures in order to avoid paying workers above-inflation pay rises. Tony Wilson, Head of the Institute for Employment Studies argues there is “little sign so far of a wage/price spiral” in the UK, as private sector pay is still way below current levels of inflation.
Ben Zaranko, Senior Research Economist at the Institute for Fiscal Studies, said the actual reason the government is calling for pay restraint is the second half of Sunak’s argument from this morning’s Cabinet: that it could reduce the government’s ability to lower taxes in the future.
In last autumn’s spending review, departmental budget forecasts were predicated on public sector pay increases of up to 3 per cent, as inflation had not begun its sharp rise as energy prices spiked due to the Russian invasion of Ukraine.
“Those plans are fixed in cash terms,” Zaranko told PoliticsHome.
“So now if you want to offer 11 per cent pay awards, or something like that, you are just not going to be able to find the money within those existing budgets as they stand.
“If you wanted to do that you'd either have to make savings elsewhere, cut headcounts, but realistically the Treasury would have to stump up some more cash, and they are reluctant to do that because if they do have any extra space in their budget they've indicated they'd much rather use those for tax cuts in the next election than they would for higher spending plans.”
The government also finds itself in a tricky position as despite claiming an inflation-level pay rise would damage the economy, they are pushing ahead with an increase to the state pension in line with inflation.
The Prime Minister's official spokesperson has defended the decision. "The Chancellor needs to consider it all in the round and the view is that we can meet that commitment without stoking those inflationary pressures,” they said.
Zaranko suggested the government’s problem is they have failed to explain to people just how badly the country has been affected by global issues, or come up with a strategy to deal with it.
“The key thing you have to bear in mind in all of this is that we have become much poorer as a country, because we import energy, we import lots of our food, and those things have become more expensive globally," he said.
When coupled with trade disruptions, Zaranko says we are “perhaps poorer than we think we are”.
“When it comes to stuff about public sector pay this year, questions about how we create a high wage economy, we've suffered this huge economic shock that makes us poorer," the economist continued.
"What the government has done is rather clumsily put together a support package to protect the very poorest through cash handouts, money off energy bills, and so on.
“But it's not signalling that it's willing to fully protect public sector workers against these higher prices that we're all facing, it just hasn't really spelled that out.
“That's partly why they've run into trouble, because I don't think they've got a clear strategy on this.”
The government is going to need answers soon though. Over the coming weeks plans for annual pay awards for NHS staff, prison officers, teachers and civil servants will be published.
Unions are braced for an offer of a 3 per cent pay increase for the NHS, which the Trade Unions Congress estimates would mean a £2,000 cut in the inflation-adjusted value of pay for nurses and paramedics, but Zaranko said it is also likely to have more long-term effects too.
“The challenge is that if you have 10 per cent inflation this year and you offer 3 per cent then you've reduced the real-terms value of people's pay by 7 per cent, and even if next year, you match next year's inflation rate, let's say it's 4 per cent, you’re not undoing any of that 7 per cent cut would happen this year,” he explained.
Following a decade of squeeze in public sector wages, an offer of 3 per cent could lead to an exodus of workers in sectors such as the NHS where there are already major staffing concerns.
Zaranko explained that NHS consultants, experienced teachers and senior civil servants have already seen large real-terms pay-cuts, and that imposing a further 7 per cent real-terms cut poses a huge risk to retention.
"You just worry at some point about whether you can recruit enough of these people, and that you can retain them, if they're going to be motivated enough, to do the overtime hours that they need to do to help clear the backlog,” he added.
“There's a danger that if you squeeze too hard you're going to start to hit public services and the quality and range of services they’re able to provide.”
The way to help drive up wages without damaging the economy would be through growth, but growth has been sluggish over the past decade and doesn't show much sign of a boost in the near future. The economy risks falling into a recession later this year and the Office for National Statistics revised GDP down again for next year.
“That is at the heart of this, if we were able to find a way to boost growth and improve productivity that would make a lot of these problems much easier," Zaranko said.
“But is the government willing to take some of the potentially unpopular decisions, about planning for example, that might help with that?
“The elephant in the room here is that every credible economist basically thinks that Brexit is feeding through to reduce trade with the rest of the world, it’s hitting the economy, it's hitting productivity, the government's own economic forecaster thinks that it will eventually reduce our national income by 4 per cent.
"It's all very well talking about growth, but sometimes the transitions that are required to try and actually boost that can't just be done in a speech, they actually require long-term dedicated policymaking.”
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