The Tories will find it harder to justify austerity now growth has returned
As the economy accelerates, it will become increasingly difficult for Osborne to defend the 1% cap on public sector pay rises.
With the return of growth (some forecasters predict output as high as 3% next year), the Tories are increasingly confident that they can win the next election. While vulnerable to Labour's charge that this is a "recovery for the few, not the many", with living standards falling even as GDP rises, they argue that higher growth will soon translate into higher salaries. As George Osborne remarked after the publication of the most recent GDP figures, “If Britain is growing then the finances of Britain’s families will start to grow.” The unspoken assumption is that so, too, will the Tories’ poll ratings.
But as I write in this week's NS politics column, Labour doesn't buy this optimistic analysis. In its view, the link between higher growth and higher wages has been severed and will not be easily repaired. Ed Miliband’s team point to the pre-crash period, when incomes for millions of low-and middle-income earners stagnated even in times of strong growth, as evidence that the market can no longer be relied upon to deliver for the majority. In an economy as unequal as Britain’s, any gains quickly flow to the top. If there is wage growth before the election, it will be of the unbalanced kind seen in April, when high earners collected their deferred bonuses in order to benefit from the reduction in the top rate of tax (the one month since May 2010 in which real incomes rose).
A further problem for the Tories is the issue of public sector wages. In his most recent Budget, George Osborne extended the 1% cap on pay increases until 2015-16, entailing further real-terms cuts for workers. But with the return of growth, such austerity will become harder to justify; voters will want their slice of an expanding cake.
If, as the Tories hope, private sector earnings begin to rise, they will no longer be able to defend public sector pay restraint on the grounds of fairnes, while voters in general are likely to become less sympathetic to the case for deficit reduction as growth accelerates. One reason why Osborne imposed immediate cuts in 2010 was that he feared they would be harder to defend if he waited until a strong recovery was underway.
If the Tories want to win over the voters they will need to remain the largest party in 2015, they would be wise to offer some relief to the public sector. As Renewal, the Conservative group aimed at broadening the party's appeal among working class, northern and ethnic minority voters, has noted, the majority of Tory target seats have a higher than average share of public sector workers, including 60% of Labour-held targets and half of the top 20 Lib Dem-held targets. While the Tories are likely to pledge to cut taxes for all workers, in the form of a £12,500 personal allowance, they should also consider easing the squeee on the public sector.