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24 July 2018

Lifting the public sector pay cap will make austerity worse, not better

Unable to raise taxes, and with only bone left to cut to fund higher pay, the government’s bind on spending is as bad as on Brexit. 

By Patrick Maguire

With ministers due to lift the cap on public sector pay today, a million workers are in line for their first wage increase in more than five years – and the government is briefing that they have austerity to thank.

“Our outstanding public servants work hard for us all – that’s why we’re announcing new pay awards,” is the line they have spun to today’s Sun. “We have worked hard to bring borrowing under control – this is the result of all that hard work.”

Suitably anodyne, but today’s announcement will only serve to make things worse for Britain’s ailing and underfunded public sector. Individual government departments are to foot the bill, rather than the Treasury, and as such will have to cut spending elsewhere. The burden of austerity is merely being shifted from those who deliver public services to the services themselves.

This should not come as a surprise. Both Philip Hammond, the Chancellor, and Liz Truss, his deputy, are fiscal hawks. Truss called on her cabinet colleagues to fund spending plans with spending cuts, rather than tax rises, last month and since last year’s election, several announcements of “new” government spending have had their sheen removed by the news that they will be funded by cuts.

Last July, for instance, a £1.3bn funding package for schools was spun by Justine Greening, then education secretary, as “extra funding”. The line that was obligingly reported until it emerged that the cash was in fact being redistributed from other parts of her departmental budget. Unless your name is Arlene Foster, there is no new money. 

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Though there is intermittent talk of an end to austerity – some of it instigated by the Chancellor and his allies – ministers have little alternative but to cut if they wish to spend. Jeremy Hunt is an illustrative case in point. The government says the £20bn he secured for the NHS last month will be funded by tax rises, and most likely a hike in fuel duty.

The problem with that aspiration, however, is that the Conservatives have no majority and enough MPs are ideologically and electorally opposed to tax increases to make them incredibly difficult, if not impossible, to introduce (a fuel duty rise would be opposed by the 13 Scottish Conservative MPs, the DUP, and more than a dozen others). Instead, ministers must cut. But increasingly, only bone remains.

Had Theresa May won the majority she expected in 2017, tax could go up as it would in any ordinary political context. Now, however, it can only deal with one fiscal headache by making another worse. Plenty of ink has been spilled over the government’s lack of an escape route on Brexit, but its bind on public spending is just as intractable – and the consequences could be just as grave.

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