The Governor of the Bank of England (Frank Augstein/ PA)
(Picture: PA Archive)Did you know that the Government is running an incomes policy, in which it seeks to place a cap on people’s wages in the public sector regardless of what is happening elsewhere in the economy? Not officially, perhaps, but the truth is that pay in the public sector is rapidly falling behind pay in the private sector.
In the three months to September, private-sector pay rose 6.8 per cent compared with the same period last year. In the public sector, the rise amounted to a mere 2.4 per cent. Workers in the public sector are thus suffering relatively more as a consequence of the cost-of-living crisis. One result is an increase in strike action. Another, longer-term, might be an inability to recruit into public services.
From the perspective of the Government’s budgetary arithmetic, it makes sense to keep a firm grip on public-sector pay. History, however, suggests that such attempts can all too easily unravel if the economic circumstances change. Take the 1978-79 “winter of discontent”. At the time, the government had set a five per cent pay guideline — an informal incomes policy — for public-sector workers. Ford workers, however, managed to secure in late 1978 a 17 per cent settlement against a background of high inflation. Multiple strikes then took place: road hauliers, gravediggers, refuse collectors, hospital staff and others withdrew their labour, choosing instead to stand around their winter braziers in a bid to smash through the government’s pay guideline.
The results were economically catastrophic. With the then-Labour government booted out of office in May 1979, voluntary pay restraint was replaced by draconian levels of interest rates, a deep recession, a remorseless rise in unemployment and the closure of swathes of British manufacturing industry. It’s another way of saying incomes policies don’t really work: they merely kick an inflationary can down a cul-de-sac.
Repeating the Seventies
So why is the Government seemingly emulating Labour’s late Seventies nightmare? The simple answer is that the energy price shock has made the country as a whole worse off. As such, we shall all have to accept reductions in our so-called “real incomes”. Given that inflation is now running at more than 11 per cent, “real” wages are falling in both the private and the public sectors. The problem is real wages are falling a lot more rapidly in the public sector than in the private sector.
Admittedly, as we enter recession, the jobs market may soften. Wage growth in the private sector fell behind the public sector both during Gordon Brown’s early Noughties spending spree and in the immediate aftermath of the 2008 global financial crisis.
Some at the Bank of England appear to share this view. In an interview published over the weekend, Swati Dhingra, the newest member of the Bank’s Monetary Policy Committee, stated that “the economic slowdown is here”, adding that “given real wages are falling, that’s indicative that we’re not there at a wage-price-spiral point yet.” She is less willing than her fellow rate setters to push interest rates up quickly.
There is, however, an alternative view. First, as with 1978-79, public-sector strikes trigger a partial reversal of public sector pay “austerity”. The Government is forced into a U-turn, allowing pay as a whole to accelerate further heading into the first half of 2023. Second, even as headline inflation drops in response to less frantic increases in energy prices — and, if we’re lucky, sustained declines — wages continue to rise as workers still look for compensation for this year’s higher energy bills. Third — and, frankly, a consequence of the first two points — we discover that inflation is now permanently higher for any given rate of economic expansion.
Another way to think about the problem is as follows. Compared with headline inflation, wage growth in the private sector is ridiculously low. Compared with official policy rates (the Bank rate is currently at three per cent), wage growth in the private sector is ridiculously high. The Bank is very much hoping that higher energy prices will slow the economy down and, as such, reduce wage growth in the private sector. If, however, the combination of still-low policy rates and renewed fiscal laxity in the face of overwhelming industrial action fuels further wage growth in both the private and public sectors, the Bank of England may have to raise interest rates much further and keep them there for far longer.
