UK government splits grow over austerity

By on 05/07/2017
The public sector pay cap has opened divisions within the ruling Conservative party just weeks after an election that denied it a majority (Image courtesy: Marcin Nowak on Unsplash.com)

Growing pressure on the UK government to end seven years of tough austerity policies by lifting a pay cap on 5.4 million public sector workers has exposed divisions within the ruling Conservative party just weeks after an election that denied it a majority.

In signs of a breakdown of collective Cabinet responsibility since the election on 8 June, several influential ministers openly backed calls to relax a 1% cap on pay rises that has been responsible for a real-term decline in public sector pay since 2010.

The chancellor, Philip Hammond, has so far resisted what he has described as “knee-jerk” demands to ease pay restraint, amid a growing public backlash against austerity that was reflected in a strong vote for the resurgent Labour opposition party.

Divisions over public spending have grown since the Conservatives found over £1bn (€1.13 or US$1.29) to spend in Northern Ireland, in a bid to woo the province’s small Democratic Unionist Party (DUP) and gather the parliamentary support to form a minority government. The government defeated a Labour attempt to remove the pay cap – the first vote of the new parliament – only thanks to the DUP.

In 2010, the then Conservative chancellor George Osborne announced a two-year public sector pay freeze as a central pillar of austerity policies introduced in the wake of the financial crisis. Osborne then imposed the 1% cap on public sector pay increases in 2012, and this was rolled over for another four years in his 2015 budget; on current plans, it is due to remain until 2020. The public sector pay bill accounts for about half of all government spending, and curtailing it has been a key component of the Treasury’s ambition to balance public finances.

As a result, public sector workers have seen take-home pay fall or stagnate in real terms and have missed out on a recovery in wage growth in recent years. Pension contributions have also risen for many civil servants, whilst redundancy settlements have been cut. A fall in the value of sterling since the UK voted to leave the European Union in 2016 – which has pushed up the cost of imports and stoked inflation – is making household budgets even tighter.

A report on public sector wages by the Office of Manpower Economics – which collaborates with the independent bodies that make recommendations on public sector pay – found a real-terms 3% drop in median hourly earnings between 2005 and 2015 for public sector workers. Some have been harder hit than others: school teachers have experienced an average fall in pay of £3 an hour in real terms and police officers of £2, while the wages of nurses have stagnated.

Pay restraint has had a damaging impact on recruitment and retention, with evidence suggesting that the financial hardship being experienced by many workers is leading to serious shortages in sectors such as healthcare as they seek better paid jobs elsewhere.

Figures just released by the Nursing and Midwifery Council showing that, for the first time, more people are leaving the profession than joining have fuelled concern about understaffing in the National Health Service (NHS). This situation has been exacerbated by the UK’s 2016 to leave the EU, which has resulted in a 96% fall in the number of European nurses registering to work in Britain. The UK health secretary, Jeremy Hunt, was the first minister to break cabinet ranks over the public sector pay cap.

Hammond has demonstrated frustration with colleagues demanding that he relax fiscal rules, telling them to “hold their nerve” and insisting they wait for his autumn Budget. A key question will be whether he succumbs to pressure then or decides to delay pay rises further.

Hammond’s dilemma is that he is constrained by tight public finances: the Institute for Fiscal Studies estimates that raising public-sector pay in line with inflation would cost about £4.1bn annually by 2019–20. And having gone backwards at the election, the government will not be able to impose other cuts it had planned in the state pension, school meals and other areas.

The chancellor has indicated that he does not want to borrow more, but has also deferred to 2025 the ambition of his predecessors to balance public finances and said that the UK needs to have a “grown-up debate” about raising taxes.

The UK’s former prime minister, David Cameron, and a former chancellor, Norman Lamont, are among senior Tories to come to Hammond’s aid, defending austerity as unavoidable.

Conservative divisions have not been helped by tensions between Hammond and the prime minister, Theresa May. And it appears that some senior Tories – most notably foreign secretary Boris Johnson and environment secretary Michael Gove, who both campaigned for Brexit – are taking the opportunity of a weakened PM to undermine Remain-supporting Hammond by calling for a loosening of the pay cap, a populist policy which they argue can be achieved without tax rises.

At the same time, senior Conservatives have acknowledged that the public has grown tired of austerity. Britain’s Trades Union Congress says three-quarters of voters want to end pay restraint, even if this means paying higher taxes.

The backlash was symbolically thrown into relief last week when members of the Unite union at the Bank of England voted to strike on 31 July in a dispute over pay – the first such strike at the Bank’s Threadneedle Street headquarters in its history.

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See also:

Fiji kicks off long-awaited pay review

Automation ‘could replace 250,000 public sector administrators’

Russian pay plan defeated by inflation

About Gavin O’Toole

Gavin O’Toole is a freelance writer and editor in London. He has written for leading newspapers, magazines, wire services and business schools about financial markets, business and regulation around the world. He has a particular interest in international relations, and a specialism in Latin American affairs. He has conducted research on this region’s political economy and has also published a number of books about its politics and natural environment. His latest title, Environmental Security in Latin America, will be published by Routledge in September 2017.

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