The 1970s saw Labour hand power to Thatcher with a pay policy regime which was grossly unfair. History must not be permitted to repeat itself and bring the tragic consequence of a Tory government once again.
The next general election could be only 18 months away and alienating millions of public sector workers – a vital component of Labour's support – in the pre–election period would be electorally disastrous. But setting aside electoral considerations, the squeeze on public sector pay is unjust, unnecessary and indeed will be economically damaging if, as seems likely, recession starts to bite.
Looking back to the 1970s, many on the left were opposed to the IMF loan linked to pay restraint and public spending cuts and supported instead the then Alternative Economic Strategy (AES). Indeed, the 30 year release of Cabinet papers from the time show that it was touch–and–go whether the Cabinet itself backed the IMF or the AES. Had the AES plan been adopted, the right wing neo–liberals feared that France and then Germany would follow suit. The subsequent 30 years of economic history would then have been entirely different, with the globalising, liberalising and privatising steam roller abandoned in a ditch before it started.
However, the IMF loan was taken and underpinned by the so–called Social Contract, involving agreed restraints on pay and prices of essentials. That pay policy was however initially accepted and regarded as fair because it involved restricting pay rises to £6 a week for all, so that the low paid received the same money increase as the higher paid. For subsequent years this was switched to a fixed percentage for all, less fair, but initially not resisted.
The government then made a disastrous decision in 1978 to set the percentage pay increase at 5 per cent, half the rate of inflation, so that real incomes were effectively cut by 5 per cent. The better off could survive this, but cutting the living standards of the poorest led inevitably to industrial action.
Thatcher then promised to abandon pay policy, omitting to mention of course that she planned mass unemployment to destroy workers' bargaining power. Had Labour decided to set pay increases at the level of inflation in 1978, or indeed held an election in the autumn of 1978, Thatcher may never had become Prime Minister, New Labour would never have been born and history would have been very different.
It has been suggested that Denis Healey privately regrets his decision in 1978 to hold pay rises below inflation. He was no doubt encouraged to do so by Treasury officials seeking to cause mischief in the hope that this would weaken Labour and usher in the Tories. The current generation of Treasury officials are no doubt making the same mischief with the same objective in mind.
The government is using the spurious argument that decent pay rises would be inflationary. This is simply not true. Inflationary pressures are being driven by massive increases in oil and other energy prices, as well as the prices of other imports such as food, which have nothing to do with domestic public sector pay rises. Even house price inflation has been caused by the vast salaries and bonuses of City fat cats pushing up house prices to astronomical levels in London and then rippling outwards across the country.
The real economic threat in the near future is recession, as the mountain of private debt built on rising asset values starts to crumble. And indeed, rising oil prices are sucking spending power out of the economy, thus reinforcing recessionary trends.
In a recession the necessary response of government should be to increase government spending and to generate additional consumer demand. Squeezing public sector pay at such a time is therefore the opposite of what the economy needs and will simply make any recession worse. The government is under constant attack by the Tories over levels of public debt, but it is not debt which is the problem. Total government debt as a proportion of GDP is still lower in Britain than in many other developed countries, despite the fact that it has been rising.
But government debt arises from two factors, expenditure and also income. It is on the income side where any problems lie, and the failure of the government to collect taxes due to it is a major factor in the current level of debt. The so–called tax gap, between the tax which should be paid and what is actually collected is enormous, and closing that gap even partially would make a substantial difference. VAT fraud alone counts for billions every year.
Beyond closing that tax gap, the government could simply raise taxes on the rich to increase Exchequer income and sustain public spending at necessary levels. Taxing the rich is not deflationary because the rich have what is called a low propensity to consume. They have so much money they do not know what to do with it so they save it. If the state takes a slightly larger slice of their income and effectively hands it to the less well off who necessarily spend all their money to live, then the economy is boosted and recession is countered.
The government is simply wrong on all counts. Squeezing pay is unjust, squeezing pay is not necessary, and squeezing pay will deflate the economy just at the time when it needs to be reflated. And for all those New Labour MPs who simply follow their leaders without question, they are actually lambs being led to slaughter at the next election who need to wake up. Even for New Labour MPs, the thought that they may lose their seats should concentrate their minds wonderfully.
Kelvin Hopkins MP
