Why the government can pay decent wages to the public sector (2023)

As many public sector workers across the country say "enough" and take industry action for fairer treatment,workplace reportconfronts the myths used to justify wage moderation in the public sector.

For years, the central government has championed the need to keep public sector payments down. Beginning in 2008, we suffered from "austerity measures" (massive cuts in public services and cuts in workers' real wages) in the name of deleveraging a national debt that had supposedly skyrocketed because the government bailed out the banks during the financial crisis.

Now, as we face multiple crises again, the government is imposing real wage cuts on public sector workers. And once again politicians, various experts and the media provide arguments to justify this decision.

But while the government and its supporters try to present their arguments as "common sense," there have always been alternative views arguing that not raising workers' wages is an ideologically motivated decision on the government's part, and not something it ought to do with the healthy economy. .

The average gross salary in the public sector is £26,805, although there are significant sectoral variations. Between 2009 and 2021, firefighters' real wages fell by 12%, or almost £4,000 a year.

Police salaries have been cut by 20% in real terms since 2010. Experienced frontline nurses are now already making around £6,000 a year than in 2010 when the Conservative Party took over.

Those:Left foot forward, July 2022

Will Bigger Wage Increases Cause Secondary Inflation?

In June 2022, former Prime Minister Boris Johnson said that "at a time when inflationary pressures are raging in the economy, there is no point in having wage increases that will only lead to further price increases because that will only negate the benefit".

Johnson appeared to blame workers for inflation, saying wage increases would cause more economic problems. He's not alone in this. Since the recent spike in inflation caused by post-pandemic and wartime business conditions in Ukraine, Conservatives, the Bank of England governor and others have argued that wages must not rise as much as prices, otherwise we will have inflationary inflation. Wage and price spirals similar to those in the 1970s.

Recently, Prime Minister Rishi Sunak also cited the wage and price spiral of the 1970s as a reason to keep public sector wages "reasonable and fair". He said: "In the past, when we've had bouts of high inflation, everyone's said, 'okay, inflation was 15%, we should all be getting 15%,' and then you have kind of a vicious circle that you never get out of it. recover." In."

However, the TUC and unions condemned this view as "absurd", with the TUC noting:

British workers suffer the biggest drop in wages in over 200 years. They desperately need more money in their pockets.”

They point out that conditions today are not what they were in the 1970s: while we are again confronted with high prices and stagnant economic growth, as in that decade, the balance of power and the distribution of wealth in British society have been completely restructured differently over the next 40 years.

Power and wealth are now increasingly concentrated in the hands of landlords and wealth owners, while collective bargaining has weakened and wages have stagnated.

So workers are certainly not awash in money and therefore not responsible for inflation. And even if wages did catch up with inflation (they don't), they still wouldn't create the additional purchasing power needed to raise prices.

RMT general secretary Mick Lynch has defended this position well in media interviews.

Lynch pointed out that inflation:

it was there before the last pay round, and many people, particularly in the public sector, haven't had a real pay rise in a decade, so how can wages cause inflation?

He emphasized that low earners in particular do not have enough money for the essentials: "Wages follow prices, not vice versa".

Instead, he argues that corporate speculation was the real driver of this prolonged period of inflation. He said, "If you keep wages low, more value flows into profit."

Secondary inflation is caused by corporate speculation

The facts support this opinion. Last October, oil major Shell reported £26 billion of profit in 2022 on higher oil and gas prices. Rival BP also posted its biggest quarterly profit in 14 years, with an underlying profit of £6.9 billion.

Meanwhile, British Gas owner Centrica, which sacked 500 gas engineers in 2021 citing financial difficulties, posted an operating profit of £1.3billion.

The real winners of this crisis are the big corporations and their owners. While Shell offered employees a one-off 8% bonus that affected 5,000 UK workers, Centrica chose to return its profits to shareholders. It is the latter that are “cash inundated” and secondary inflation rises.

Join the union's investigation, published in June 2022, confirms this. This shows that profit margins for FTSE 350 companies were 73% higher in 2021 than pre-Covid.

The jump in yields between October 2021 and March 2022 alone accounted for 58.7% of inflation, according to Unite. Workers demanding better wages now simply reach for it.

Economic logic supports this. For example, if procurement costs increase by 10%, companies pass the 10% price increase on to customers. But if labor costs rise by just 5%, the company makes a huge incremental profit while workers are worse off.

The argument that wages drive inflation is not only false, but aims to pit workers who feel powerless to improve their conditions against unionized workers who organize to improve their lot. It also conceals the acceleration of the massive transfer of wealth from the workers to the hands of a few.

The state can not pay?

The second myth concocted by politicians and the media to deny public sector workers a fair deal is that the government simply cannot spend more on wages because it would mean borrowing more when the national debt is already is high.

This argument was made in the aftermath of the 2008 financial crisis, when the government was forced to spend £800bn on QE to bail out the banks, a bailout eventually used to justify a decade of austerity and wage cuts.

Among others, it is now being used again by Prime Minister Rishi Sunak, who says spending during the Covid pandemic has sent debt skyrocketing and the government needs to rein in spending.

The argument, based on an analogy comparing government finances to a family's finances, originated with the Thatcher government in the 1980s and has prevailed ever since, although governments and families are very different.

The debate is often emotional, with phrases like "The national debt is out of control"; “the country has maxed out its credit card”; “We cannot make future generations pay for the present”; and "There Is No Magic Money Tree", all of which aim to lower expectations of what can be achieved.

Yet while this myth is rife, there are also signs that it is disintegrating: the government appears to be able to find money when it needs it, and has done so during the Covid crisis and in response to the War in Ukraine done without having to ask. first borrowed. .

The governmenthe canallow an inflation-linked salary increase for public sector employees

Professor Prem Sikka, Academic Accountant and Member of the House of Lords,arguethat the government can pay workers, even within its own current political framework.

He says the government spent around £230bn on public sector wages in 2021-22, meaning that every 1% wage increase adds £2.3bn to £2.4bn to the bill's wages .£ will increase.

Writing in July 2022, when CPI inflation was at 9% (currently 10.5%), Sikka said: A 9% wage increase would add around £21bn to the total state payroll. When he was chancellor, Sunak already committed £7 billion of additional spending to the government, meaning that a further £14 billion would need to be raised to pay workers properly.

This, Sikka argues, could easily be covered by raising taxes. Due to higher inflation, the government is already collecting more income tax, corporate income tax, capital gains tax, VAT, fuel tax, inheritance tax and other taxes. Income tax alone is expected to generate an additional £20bn and total tax revenues from inflation will be much higher: enough to cover the 9% rise.

Furthermore, if the government were to abolish the 9%, on average around 35-40% of the wage increase, almost £8 billion, would flow back to the government in the form of various taxes, including the 20% income tax on every salary. 13.25% increase in social security and more VAT, mineral oil tax and other indirect taxes.

Finally, Sikka argues that changing the tax system so that wealth and assets are taxed as heavily as income and consumption would generate more money for wage increases and help fight inequality.

He says £25bn could be raised by taxing capital gains at the same rates as earned income and a further £8bn could be raised by taxing dividends. Billions more could be raised through wealth taxes and financial transactions.

Is the national debt "out of control"?

Aside from allowing the government to pay more, some argue that the UK's debt isn't as much of a problem for the country as many in government would have us believe. In interviews in August 2022, he said that the huge amount invested in quantitative easing after the 2008 financial crisis was largely due to the government buying back its own debt. Therefore, it should not be considered part of the debt.

He said: "If you exclude quantitative easing, which is 'money the government owes the government', we are below 60% debt to GDP, which is a 'perfectly sustainable level'".

Although this statement destroyed the austerity logic in the first place, Rees-Mogg nonetheless argued that the policy was necessary and that "we can afford a crisis because of it".

From a different angleRichard Murphy, an accountant and academic activist, regularly argues that the Office of Budgetary Responsibility, the Institute of Fiscal Studies, and even the Office of National Statistics account for government debt and interest payments (including, among other things, the QE total) in a deliberately misleading and intended manner that Support the government's position that it cannot increase spending and offer better wage increases.

Murphy and others, such as American academic Stephanie Kelton in her bookThe Myth of the Deficit: Modern Monetary Theory and the Birth of Economics, argue that public debt discussions should be decoupled from spending anyway, as the government creates new money out of thin air via the Bank of England as it spends it on the economy.

You don't have to expect or rely on loan financing or tax revenue to pay things off as we've seen during Covid, nor is the money through anything e.g. B. gold, except for a "promise to pay".

change of perspective

They advocate a shift in perspective on what government spending, debt and taxes really are, away from the politically motivated analogy of government as a budget.

For him, the idea that government debt has to be paid is actually wrong, because instead of financing expenditure, the government creates debt to meet the need for stable savings.

The government sells gilts to pension funds and other savers looking for a safe haven for their money. Eliminating them by paying down debt would actually be bad for the financial system.

This view, known as Modern Monetary Theory (MMT, a practical description of how money circulates rather than theory), also argues that taxes don't fund spending either.

Instead, it performs other functions. This includes taking money out of circulation (and thereby controlling inflation), valuing currency, encouraging certain behaviors, fighting inequality and maintaining a sense of the social contract; where citizens pay and receive services in return.

This view may come as a surprise, especially since experts repeatedly associate taxes with public services and speak of “tax money”. Importantly, the suggestion that the government creates new money as it issues it does not mean that it can "print money endlessly," although opponents regularly try to stoke fears of hyperinflation. There are limits to what can be spent based on resources and production capacity.

However, the MMT perspective shows that government spending decisions are based on what the government believes rather than actual financial constraints and are therefore ideological. According to Murphy, the government's current plan is:

  • Permitting/encouraging corporate speculation and the massive transfer of wealth from workers to owners;
  • causing a recession by reducing people's incomes and discretionary spending through wage cuts and increasing the cost of money and financial hardship for borrowers through interest rate hikes;
  • Pushing public sector workers like teachers, nurses and caregivers into the private sector so that public services become even worse and there are more excuses to privatize them.

It doesn't have to be. There is ample evidence that government can pay public sector employees. It is now up to the unions and their supporters to continue to stand up for them and back them up with action.

This is an edited and updated version of an article published in the September 2022 issue ofworkplace report

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