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……