That Keynesian ratchet

So it was in 2010, when David Cameron assumed office. It is the case today, too, but the capacity to run an undeclared pay policy that keeps public sector wages under continuous downward pressure has come apart with inflation running above 10%. The nurses are castigated for striking for an inflation increase plus 5%, which is seen as ”unreasonable”. But were it offered, their starting salaries in real terms would still be lower than they were in 2010. It is a similar story across the public sector.

2010 was also the end of a 13 year period where public sector wages had been deliberately and massively moved ahead of private sector ones. But the Keynesian ratchet insists that whatever the peak – of anything, taxes, pay, portion of the economy etc – previously reached must now be considered the absolute minimum from which we measure everything for evermore.

Making it very difficult to even mutter that after those 13 years of the One Eyed Viking spending like a drunken sailor perhaps a reconsideration was due?

It is a pay policy not openly acknowledged by ministers. Future public spending plans are set out in successive comprehensive spending reviews: public sector wages are budgeted to rise in cash terms for the next three years by never more than the assumed inflation rate. Varying parts of the public sector – there are eight pay review bodies, ranging from the NHS to education – may choose to offer more than the cash cap reflecting circumstances but, if so, the resources will have to be earned by “efficiency savings”. In the case of the NHS, those are assumed to be 2.2% a year.

Efficiency savings. Well, yes. This is the aim and purpose of all that innovation, investment, technological advance and so on. That we become more efficient over time. Gain greater output from the same resource inputs, possibly, if we’re lucky, gain greater output from fewer resources consumed. It is the actual aim of the game.

And note. If the current management set up means that such total factor productivity gains are not possible then it’s the management system that needs to change. Because it really is the aim of the game. If the NHS cannot increase productivity then we’ve got to change the NHS. A certain William Baumol had words to say about that too – yes, increasing productivity in services is difficult therefore we need more markets in services.

In September, private sector pay in real terms (including bonuses) had grown cumulatively 5.5% since 2010, while in the public sector it had declined by 5.9%, with nearly half of that formidable 11.4% gulf opening up since January 2021.

Well, you know, maybe that’s what is actually necessary? The difference in TFP improvement added to G. Brown’s wall pissing of our money might mean that’s the change in relative wages necessary?

These are not acts of God. They are the results of policy choices.

OK, but is it good or bad policy, Willy?