Should public sector wages be frozen to help pay for Covid?

The Institute of Economic Affairs (IEA) often publishes short blogs where two people debate a topical question, in this case: should public sector wages be frozen to help pay for Covid? Andy Mayer argued in favour, I was against. (You can read the original version here, and a lot more on the IEA website, including these comments from Professor Len Shackleton – agreeing with Andy!)

YES – says Andy Mayer

Unusually, as an elected local Councillor I am directly involved in these decisions. Back in spring, at the height of lockdown misery, my authority decided it would ditch a one-year inflationary pay deal… and instead, impose a three-year inflationary pay deal.

I was one of very few voices against this. A pay freeze was in order.

The consequence of the rise and collapse of forecast revenue from rates and events is now that the authority is consulting on removing roles. An entirely predictable outcome.

Generally and politically, the level of tone-deaf unwisdom involved in awarding civil servants a pay rise, at a time when 10% of the economy has gone missing, and taxpayers are being laid off or furloughed, invites commentary fit only for Twitter.

I wrote about this in April, in relation to the campaign for NHS pay rises:

“In the pandemic the NHS staff have become, and reasonably so, some of the few staff with guaranteed secure jobs. The longer the lock-down goes on however, and the more private businesses collapse the greater the risk of that difference turning to resentment.”

Resentment that we can now see in growing protests against the lockdown, even if targeted at policy, if not the staff. That the staff cannot understand or empathise with those protesting, however, cannot be helping. A pay freeze would at least improve their grasp of reality.

Pay rises are also economically unwise.

At one level this is trivial. There is no money. There is no magic money tree. The UK is £2.1 trillion in debt. Expenditure is exceeding evenue by £260bn just for the period since April, and may land between £350-400bn by the end of the financial year.

No amount of pleading for exemptions based on moral worth can avoid these facts. While teachers and nurses may add more value to the life chances of children than aromatherapists, they will do so regardless of pay rise this year.

Pay is not a measure of social value. In a free society it is negotiation between what someone is prepared to pay you, and what pay you are prepared to work for. All of us, looking nervously at the end of the furlough scheme, are currently prepared to work for less as a result. Keeping our jobs is the win.

Pay is not compensation for rising prices. The cost of living is rising due to deliberate policy damage to supply chains and there being fewer things upon which we can legitimately spend money. Contrary to some of the expectations, deflation in the shut services sectors has not yet generated negative price growth.

Artificial pay rises from borrowing will simply add to these costs, making a trivial difference to the depreciation of the cost of historic debt long term, and a large immediate difference to the differential between the private and public sector.

There is conversely certainly a Keynesian pump priming argument for keeping spending going when times are tough. This in order to maintain confidence and avert a spiral of reduced demand undermining supply and destroying perfectly viable businesses.

But, there is no case this should involve special treatment for Government statisticians and DVLA administrators.

The John Maynard lever has been pulled repeatedly during the pandemic, from the furlough scheme, to special loans and tax deferral.

It is palliative care, when what is required is a cure, or in this case, a vaccine to end the damaging restrictions on economic activity.

In short, if Rome wishes to survive it needs to pay heed to reopening the forum and the gates of the City. Not pandering to the Praetorian Guard’s demands for more gold to save Caesar. That model of Government did not end well, for either Caesar, or Rome.

___________________________________________

NO – says Julian Jessop

It is right to be tough on public sector pay. A recent study by the ONS found that the average public sector earnings premium was still 7% in 2019, even before Covid struck. Since then, workers in the private sector have borne a disproportionate share of the economic burden of the pandemic in terms of lost incomes and jobs.

Nonetheless, there is little sense in a temporary pay freeze for all public sector workers (oddly excluding those working for the single biggest employer, the NHS), for three main reasons.

Firstly, there is no rush to find savings to ‘help pay for Covid’. This year’s budget deficit could easily top £400 billion and the stock of debt has already reached £2 trillion. But the public finances are notoriously difficult to forecast. Indeed, total borrowing in the seven months to October was actually £76.5 billion lower than the OBR had estimated just a few months earlier.

We can be confident that borrowing will fall sharply as the economy recovers from Covid. The repayment of the extra debt taken on to pay for the pandemic can be spread out over a very long time, because it can be rolled over by selling new government bonds (gilts) as old ones mature.

Of course, the government still has to pay interest on this debt. But borrowing costs are currently very low, and the Treasury gets some of these payments back anyway from the Bank of England. Even if interest rates do rise soon, the long average remaining life of UK gilts (about 15 years) means that cheap borrowing is locked in for an extended period.

Secondly, this means that the government can and should concentrate on supporting the economy, while letting the public finances take the strain. Cancelling planned wage increases will not help here. The millions of people affected by a public sector pay freeze may happen to work in the civil service, the police, or state education, but they are consumers too. This would undermine their confidence and spending, for very little benefit.

It might be argued that paying public sector workers more could increase wage pressures in the private sector and perhaps add to price inflation. As it happens that would not necessarily be a bad thing, if it reduces the real burden of debt. But with ample spare capacity in the economy and in the labour market, this risk is surely small.

Thirdly, it is fair to ask why public sector pay should increase at all. But there are still good arguments for pay rises on their own merits, and on a case-by-case basis. Taking teachers as an example, the latest report from the independent pay review body made the case for ensuring the ‘teaching profession is better placed to attract high-quality graduates and retain good teachers both now and when the labour market recovers’. This is another reason to think that a temporary saving of just a few billion pounds from a blanket freeze could be a false economy.

On the other side, the arguments for a public sector pay freeze seem to boil down to the view either that private sector workers have suffered most from the pandemic, so we should make sure those in the public sector suffer too, or that trimming a few billion from the budget deficit in 2021 is more important than doing everything possible to support the economic recovery. Neither point convinces me.

Public sector pay (like foreign aid) may well be another aspect of government spending that needs fundamental reform, but now is not the time for penny-pinching.

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