Fiscal policy, public sector pay and employment flexibility

Steve Bundred, Chief Executive of the government Audit Commission, has suggested that public sector workers would willingly accept a pay freeze this year, because they have done well in recent years and will recognise that a pay freeze is better than the alternative. Reports of his comments will focus particularly on education and the NHS, as two monopsony employers who provide the services used by most taxpayers (the NHS remains the world’s third largest employer, suggesting huge scope to make savings by reducing the pay bill). Those services were being given as the focus of the debate in parliament this week over public spending and investment between Gordon Brown and David Cameron. The Prime Minister’s enjoyable statement in Prime Minister’s Questions on Wednesday that there would be a ‘zero percent increase’ in public spending in 2013-4 was reflecting his determination that the way to pull the country out of recession is through continued spending on government investment and public services. Mr Bundred however is suggesting that there have to be cuts amounting to £50bn in order to begin the task of reducing national debt – that would be a cut of approximately 8% of the Treasury’s projection of £671bn managed expenditure for 2009-10.

In the private sector companies like British Airways and BT are using a range of pay and employment deals to cut their capacity and costs and trim their budgets. Both have been widely reported to offer staff the chance to work part-time for a pro-rata reduction in pay, or to take unpaid leave. BT are offering 25% of annual pay as an up-front payment to staff who agree to take a year off. BA are encouraging staff to apply for unpaid leave, which has been taken up by 4,000 so far, and even say that 800 have agreed to work unpaid for some time in the next few months, in order to protect their jobs and help the company through the downturn in demand. That lack of demand in the private sector does not affect the public sector – demand for public services such as state education and health care being provided free of charge at the point of consumption is not affected by the recession in the same way as economic goods are. But the sources of the funds used to pay for those services are severely affected by the reduction in government income, and the stunning increase in national debt brought about by bail-outs to (private) financial institutions, car manufacturers and rail service providers alike has to be funded somehow, sometime.

Will public sector unions agree with the claim from the head of the Audit Commission that it would be reasonable action to accept pay freezes in the current economic climate? There is some relevance to behavioural economics here – would you opt for the certainty of a real-terms pay cut now in the hope of avoiding possible redundancy or higher tax rates in the future? Writing in the Observer, Steve Bundred refers to education: “Since 1997 we have employed 32,000 more teachers, 100,000 more teaching assistants and 70,000 more support staff, but we’ve got 80,000 fewer pupils.” The response of Chris Keates of the teaching union NASUWT doesn’t accept this – quoting from The Observer again, she says said the investment in education was to redress decades of underfunding. “The idea that you have to have some equity of misery, that because the private sector is suffering the public sector must too, is disgraceful. What it is doing is not understanding the role of public services in a recession - to sustain and rebuild the economy.”

The debate over how far government spending can be used to overcome the effects of the recession by maintaining aggregate demand but without a matching increase in government revenue, and whether this is a natural reflection of automatic stabilisers for the economy, will surely continue to at least the next election and quite possibly the one after that. Hopefully the surge in students opting to take A level Economics will mean that there is a significant number of new 18-year old voters able to evaluate the fiscal plans of the politicians in order to decide who they want to vote for.