We all know what comes next, don\’t we?

Alistair Darling has said that public sector workers must share in the pain of the recession by having their pay squeezed.

Cue howls of outrage in 3…2…1…

But, reducing public sector pay would be fiscally contractionary and we don\’t want to do that in a recession…..

Well, that was quick.

There’s just one problem with his argument – which is we need cuts in government spending now – and that is that it is utterly economically illiterate. There are numerous reasons.

First, at a time when demands on civil servants will be very high indeed why risk alienating them by refusing any pay rises? Suppose a 2% rise was given. Given that no more than half government spending is on wages that would cost £5 billion. Slap minimum tax rates on those earning £100,000 a year or more – all of whom could easily afford to pay more tax and all of whom are the greatest beneficiaries of the bank bail out (after all, it was their savings that were protected) and the problem is solved.

But that’s the pragmatic view. The absolutely appropriate Keynesian one is that whilst unemployment is rising (and it is) the only correct course of action by the government is to spend.

Sadly, taxing to spend on civil servants\’ wages is not in fact fiscally expansionary……

9 thoughts on “We all know what comes next, don\’t we?”

  1. I suspect another pre-election gambit.

    1. Govt insists public sector must share pain of pay cuts.
    2. Spineless Opposition feels obliged to say “oh yes, definitely”
    3. Govt backs down after beer and butties with the Union
    4. Opposition is now the party that’ll cut public sector wages
    5. Public sector employees vote Labour to avoid pay cut.

    Simples!

  2. 5., reminds me of my old economics lecturer at uni; a sage old goat. His view was that a precondition of Labour being allowed to govern should be the removal of sufferage from public sector workers.

  3. Whether this is expansionary or not depends on how marginal propensity to consume varies between high earners and public sector workers: if the former had an MPC of 0 and the latter of 1, for example, it’d be highly expansionary.

  4. Don’t you find it funny that the various trade unions are saying that it’s silly to make public sector workers share in the private sector pain simply as a pointless gesture. And they say this after they demand tax rises on the rich that won’t raise extra revenue as a gesture to making the rich share in the pain of the recession.

  5. Yes, and if I could fart show tunes with my arse I could make a lot of money. Is there any reason to suppose a wildly different MPC for public sector workers and the rest of the population? Nope.

  6. Richie-boy’s suggestion is to tax people who earn more than £100k per year to fund public sector pay rises, whilst not raising taxes on people who earn less than £100k per year. And there is very good reason to suppose that people on approximately average incomes (which public sector workers are) have a higher MPC than people at the top of the income bracket.

    That doesn’t make it a good idea. But it does elevate it from the realms of ‘internally inconsistent stupidity’ to ‘well within mainstream economics’.

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