Why the government can afford decent public sector pay (2023)

With many public sector workers across the country saying “enough is enough” and taking industrial action for a fairer deal, Workplace Report confronts the myths used to justify public sector wage restraint.

For years, central government has argued for the need to keep public sector pay down. From 2008, we suffered “austerity” — huge cuts to public services and real terms pay cuts for workers —in the name of bringing down a national debt that had supposedly ballooned because government bailed out the banks during the financial crisis.

Now, as we face multiple crises once again, the government is imposing real-terms pay cuts on public sector workers. And once more, politicians, various pundits and the media are wheeling out arguments to justify this decision.

But while the government and its supporters attempt to present their arguments as “common sense”, there have always been alternative viewpoints arguing that not raising workers’ pay is an ideologically-driven choice on the government’s part, rather than anything to do with sound economics.

The average gross public sector salary is £26,805, though there are considerable sectoral variations. Between 2009 and 2021, firefighters’ real pay has been cut by 12%, or nearly £4,000 a year.

Police officers’ pay has been cut by 20% in real terms since 2010. Experienced frontline nurses are already around £6,000 per year worse off now than in 2010, when the Conservative party came to office.

Source: Left Foot Forward, July 2022

Higher pay rises will cause secondary inflation?

Back in June 2022, former prime minister Boris Johnson said that, “at a time when you’ve got inflationary pressures in an economy, there’s no point in having pay rises that just cause further price rises because that just cancels out the benefit”.

Johnson appeared to blame workers for inflation, claiming that pay rises will cause more economic pain. He is not alone in doing this. Ever since the recent rise in inflation, caused by post-pandemic trading conditions and the war in Ukraine, the Tories, the governor of the Bank of England and others have argued that wages must not rise as strongly as prices or we will get an inflationary wage-price spiral akin to that of the 1970s.

Recently, prime minister Rishi Sunak also evoked the 1970s wage-price spiral as a reason for keeping public sector pay “reasonable and fair”. He said: " When we've had periods of high inflation, what happened in the past is everyone said 'okay inflation was at 15% we should all get paid 15%' and then you have a kind of vicious cycle which you never recover from.”

However, the TUC and unions denounced this view as “nonsense”, with the TUC pointing out:

British workers are suffering the longest wage squeeze in more than 200 years. They urgently need more money in their pockets.”

They emphasise that today’s conditions are nothing like those of the 1970s. While we’re again facing a period of rising prices and stagnant economic growth, such as occurred in that decade, the balance of power and distribution of wealth in UK society has been completely restructured over the intervening 40 years.

Power and wealth are now increasingly concentrated in the hands of property and asset-owners while collective bargaining has been weakened and wages have seen stagnant growth.

Workers, therefore, are certainly not awash with cash — and are therefore not responsible for inflation. And even if wages were keeping up with inflation (they are not), they still would not create the additional purchasing power needed to push up prices.

Mick Lynch, general secretary of the RMT rail union has argued this position well in media interviews.

Lynch has pointed out that inflation:

was there before the latest pay round, and many people, especially in the public sector have not had a real terms pay rise for a decade, so how can it be that wages are causing inflation?”

He emphasised that low-paid workers especially have not got enough money for essentials — “wages are chasing prices, not the other way around”.

Instead, he argues that the real driver of this sustained period of inflation has been corporate profiteering. He said: “If you keep wages low, more value goes into profit.”

Secondary inflation is caused by corporate profiteering

The facts support this view. last October, oil firm Shell reported £26 billion of profits made in during 2022 due to the higher gas and oil prices. Rival firm, BP, also reported its biggest quarterly profit for 14 years, with underlying profits of £6.9 billion.

Meanwhile, British Gas owner Centrica who, in 2021 dismissed 500 gas engineers citing financial difficulties, made operating profits of £1.3 billion.

The real winners from this crisis are large corporations and their owners. While Shell offered a one-off bonus of 8% to employees, affecting 5,000 workers in the UK, Centrica opted to dish out its winnings to shareholders. It is the latter who are “awash with cash” and driving up secondary inflation.

Research by the Unite union, published in June 2022, confirms this. It shows that FTSE 350 companies' profit margins were 73% higher in 2021 than before Covid.

The profit jump between October 2021 and March 2022 alone was responsible for 58.7% of inflation, according to Unite. Workers demanding better pay now are merely trying to catch up.

Economic logic supports this. When supply costs go up, say by 10%, companies shift the 10% price increases onto customers. But if the wage bill only goes up 5%, the company makes huge additional profit while workers are worse off.

The argument that wages are pushing up inflation is not only wrong, but designed to pit workers who feel unable to improve their conditions against unionised workers organising to improve their lot. It also hides the acceleration of the wholesale transference of wealth away from workers into the hands of a few.

The government can’t afford it?

The second myth wheeled out by politicians and the media to deny public sector workers a fair deal is that the government simply can’t afford to spend more on wages — because it would mean borrowing more when the national debt is already high.

This argument was used after the 2008 financial crisis, when the government was forced to spend £800 billion in quantitative easing to bail out the banks, a bailout that was ultimately used to justify a decade of austerity and wage restraint.

Among others, it’s now being used again by prime minister Rishi Sunak who says spending during the Covid pandemic has added to the debt, and the government must once more reign in spending.

The argument, based on an analogy comparing government finances to that of a household, originated in the Thatcher government in the 1980s and has remained powerful ever since, despite the fact that governments and households are vastly dissimilar.

Debate is often emotive, with phrases such as the “national debt is spiralling out of control”; “the country is maxed out on its credit card”; “we can’t make future generations pay for today”; and “there is no magic money tree” — all designed to lower expectations around what is achievable.

However, while this myth is pervasive, there are also signs that it’s breaking down: the government seems able to find money when it needs to spend — and did this during the Covid crisis and in response to the Ukraine war without the need to borrow first.

The government can afford an inflation-linked rise for public sector workers

Professor Prem Sikka, an academic accountant and member of the House of Lords, argues that the government can afford to pay workers, even within its own current policy framework.

He says that in 2021-22, the government spent around £230 billion on public sector pay, which means every 1% pay increase will add £2.3 billion-£2.4 billion to the wage bill.

Writing in July 2022 when CPI inflation was at 9% (it’s currently 10.5% now), Sikka said: a pay rise of 9% would add around £21 billion to the government’s overall wage bill. When he was chancellor, Sunak already committed the government to an additional £7 billion spend, so an additional £14 billion would need to be found to pay workers decently.

This, Sikka argues, can easily be covered by the increase in taxation. Due to higher inflation, the government is already collecting more in income tax, corporation tax, capital gains, VAT, fuel duty, inheritance tax and other taxes. Income tax alone is expected to generate an additional £20 billion and the total tax take from inflation will be much higher: enough to cover the 9% rise.

Additionally, if the government coughed up the 9%, on average around 35%-40% of the pay rise, nearly £8 billion, will be returned to the government in various taxes including the 20% income tax on any pay increment, 13.25% national insurance as well as more in VAT, fuel duty and other indirect taxes.

Finally Sikka argues that making changes to the tax system so that it taxes wealth and assets as much as it does income and consumption would return more cash for pay rises and help to combat inequality.

He says £25 billion could be collected by taxing capital gains at the same rates as earned income and another £8 billion could be collected by taxing dividends. Further billions could be collected through wealth and financial transaction taxes.

Is the national debt 'out of control'?

Alongside showing the government can afford to pay out more are those who argue that the UK debt is not such a problem for the country as many in the government would have us believe.These voices have included former Tory minister Jacob Rees-Mogg who, in interviews in August 2022, said the huge sum paid out in quantitative easing after the 2008 financial crisis was essentially the government buying back its own debt. It therefore should not be considered as part of the debt at all.

He said, “if you exclude quantitative easing, which is ‘money owed by the government to the government’, we’re under a 60% of debt to GDP ratio which is a ‘perfectly sustainable level’.”

Despite this statement destroying the reasoning for austerity in the first place, Rees-Mogg still argued that the policy was necessary, and that “we can afford a crisis because of it”.

From a different angle, Richard Murphy, an academic accountant and campaigner, regularly argues that the way in which the Office for Budget Responsibility, Institute of Fiscal Studies and even the Office for National Statistics account for the national debt and interest payments (by, among other things, including the QE sum) is deliberately misleading and designed to support the government’s position that it cannot afford to increase spending and give better pay rises.

Murphy and others, such as American academic Stephanie Kelton in her book The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy, argue that discussions of national debt should be de-linked from spending anyway, as the government, via the Bank of England, creates brand new money out of thin air when it spends into the economy.

It does not need to wait for, nor rely on, funding from borrowing or tax receipts in order to pay for things — as we have seen during Covid — nor is the money backed by anything, for example, gold, except a “promise to pay”.

Shift in perspective

They argue for a shift in perspective around what government spending, debt and tax actually are — away from the politically-motivated analogy of government-as-household.

According to their view, the idea that government debt needs to be repaid is actually a false one, because rather than funding spending, the government creates debt to fulfil a need for a stable means of saving.

The government sells gilts to pension funds and other savers looking for a safe haven for their cash. Removing these by paying off the debt would actually be detrimental to the financial system.

This view, known as Modern Monetary Theory (MMT — more a practical description of how money circulates rather than a theory), also argues that taxation does not fund spending either.

Rather, it performs other functions. These include removing money from circulation (and thus controlling inflation), giving value to the currency, incentivising certain behaviours, combatting inequality and maintaining a sense of the social contract; where citizens pay in and also receive benefits back.

This view can seem surprising, especially when pundits constantly link tax to public services and talk about “taxpayers’ money”. Importantly, pointing out that the government creates new money when it spends does not mean that it can “print endless cash” — although opponents regularly try to stoke fears of hyperinflation. There are limits to what can be spent based on resources and productive capacity.

However, the MMT perspective does show that decisions around government spending are based on what government believes — rather than any real financial constraints — and are, therefore, ideological. According to Murphy, the government’s current plan is to:

  • allow/support corporate profiteering and the mass transference of wealth from workers to owners;
  • cause a recession by reducing people’s income and discretionary spending through pay cuts, and increase the cost of money and financial hardship for borrowers through interest rate rises;
  • force public sector workers such as teachers, nurses and carers into the private sector so public services will get even worse, and there are more excuses to privatise them.

It doesn’t have to be this way. There is plentiful evidence that the government can afford to pay public sector workers. It is now up to unions and their supporters to keep making the case and to back it up with action.

This is and edited and updated version of an article that appears in the September 2022 issue of Workplace Report

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