It’s been a difficult few years for public sector workers. Five million, including doctors, teachers and soldiers, have seen pay rises capped at just one per cent since 2012.
When the cap was introduced, it was explained by the coalition government at the time as a necessary measure to help return the country’s finances back to health.
The government felt we were living beyond our means and needed to rein in spending – the pay cap was a central part of its austerity measures designed for this purpose.
Squeeze: Public sector pay rises are much lower than they were before the financial crisis
But five years on, increasing numbers feel that they have done their bit. They have seen their pay eroded year after year, with no suggestion that the era of austerity is ending.
Matters have got worse in recent months as inflation has started to rise quickly. Consumer Prices Index inflation is now at 2.9 per cent – considerably higher than the rate at which public sector pay is rising – and higher than private sector pay rises too.
This means that both public sector and private sector workers’ spending power is decreasing, but the situation is considerably worse for the former.
Millions of workers in the private sector have also suffered – and figures how they suffered more in the immediate aftermath of the financial crisis.
Once inflation is taken into account, both public and private sector workers have seen pay fall by around 5 per cent since the financial crash, according to the Institute for Fiscal Studies.
However, the debate has arisen around public sector workers since it is over their pay that the government has control – and while private sector pay has picked up, the public sector still has a 1 per cent peg.
So what’s the debate?
The issue now is whether we can afford to finally give public sector workers a pay rise.
Debate: Chancellor Philip Hammond says we need to talk about how we’re going to fund more money for public services
For years now, austerity and focusing on ‘balancing the books’ has been one of the pillars of the current government.
However, for the first time in some years, this premise has been questioned at the heart of government.
Over the past week, a string of Cabinet ministers have lined up to demand the one per cent limit is lifted.
Boris Johnson and Michael Gove joined the clamour over the weekend, suggesting that taxes might not need to go up in order to underwrite the move.
The Chancellor Philip Hammond, on the other hand, warned last night that if we taxpayers want more funding for public services, they’ll have to be willing to pay more tax to fund it.
How much would it cost?
Every percentage point by which public sector pay is lifted costs the Exchequer around £2billion.
With inflation closing in on three per cent, public sector workers would need a pay lift of around this amount just to stand still, so the costs are not small.
Of course, it is worth noting that a chunk of any pay increase will flow back to the government through income tax and national insurance – and a sizeable portion of higher wages are likely to be spent, thus boosting the economy.
Where would we find the money?
The Chancellor believes the only way to find the billions required would be to increase other taxes.
However, that’s a tough thing to do for a government with a weak majority, which can’t rule out having to go to the polls again within the next couple of years.
Another option being considered by ministers is cancelling tax cuts that have already been pencilled in. The idea here is that people are not used to the tax cuts yet, so will miss them less than new tax rises.
Dropping a scheduled cut in corporation tax from 19 to 17 per cent could be worth £510 million in 2019-20 and £2.6 billion the following year, according to the Times.
The government could also delay its pledge to increase the personal allowance from its current level of £11,500 to £12,500 in this parliament.
However, arguably this would be toughest on those on the lowest incomes and be akin to giving with one hand and taking with the other.
Debate: Boris Johnson and Michael Gove have suggested that a public sector pay rise needn’t be paid for with additional taxation
Could we do it without raising taxes – and still hit the deficit targets?
It’s all a matter of priorities, according to Paul Johnson of the respected think tank the Institute for Fiscal Studies.
‘If that were the government’s biggest priority then it could probably afford to do it, even within its own current fiscal targets,’ he said today in the Times.
The government has a target to borrow below two per cent of national income by 2020. At the moment, it has headroom of around £26billion on this target – easily enough to raise public sector pay, says Johnson.
However, this headroom is far from guaranteed. Should the economy take a downturn, money coming in from taxes will be smaller than expected and the headroom will quickly disappear.
Also, there may well be other things the Chancellor needs to spend money on, for example social care, additional spending on the NHS or other costs that emerge.
‘The issue, as ever, is one of priorities. The answer to the question of whether the government can afford this, that or the other is almost always yes, if it chooses to,’ Paul Johnson adds.
‘But choices involve trade-offs, they involve doing more of this but not more of that, or indeed less of something else.’
A similar debate was raised when Prime Minister Theresa May approved an additional £1billion on spending on infrastructure and health in Northern Ireland in return for the support of the DUP, which enabled her to form a majority government.
It led to insinuations that a government will always find the money for something when it has to – it’s just a matter of prioritisation. The argument is as old as time, and popularly summarised by American author Robert Fulghum who is credited with having said: ‘It will be a great day when our schools have all the money they need, and our air force has to have a bake-sale to buy a bomber.’
Many people believe that the government is overspending in some areas at the expense of others – but this is always going to be a matter of personal opinion and ultimately it’s up to government to decide what it thinks is important – and us to vote for the one we most agree with.
Is spending on wages necessarily a drain on the public coffers?
There is another way of looking at this as well. Increasing wages for millions of workers does not just act as a drain on the economy – it also offers a boost.
Imagine, for example, that a family had an extra £30 a week in their pay packets. They may just save it or use it to pay off debts. But they are just as likely to spend it, say at the supermarket, or a trip to the cinema or train tickets or petrol to see friends and family.
When they do that, the government will get a bit of that £30 back, through VAT, or income tax or corporation tax.
What would Keynes say? The famous economist suggested that government spending can boost the economy.
Then in the pockets of retailers or service providers, that same £30 is then likely to be spent again – if lots of people are spending more money in the shops or going out, then businesses invest in more staff, or infrastructure or products.
That too will result in more tax going back to the government. And so it goes on.
So it is not the case that every pound spent by government is another pound we’re getting into debt – money spent in the right way can sometimes give money back to the exchequer as well.
Known as the fiscal multiplier, this idea was first proposed by John Maynard Keynes in the 1930s, and is used by economists to make a case for increasing spending even – or especially – in a downturn.
Furthermore, some economists argue that the Chancellor’s debt targets could be pushed further down the road – especially while the cost of borrowing for the government remains relatively low.
What will happen next?
The Treasury is still fiercely resisting demands to make any announcement about pay before the autumn.
The Prime Minister’s official spokesman said one per cent awards already confirmed for nurses, doctors, dentists and the armed forces this year will not be revisited.
However, ministers have revealed there are ‘active discussions’ about other parts of the public sector, such as police and teachers, where salary review bodies have yet to report.
What is certain is that this debate is not going anywhere.
Why are we talking about this now?
For several reasons. One, perhaps discontent has simply been growing over time to the point at which rising numbers are saying ‘enough is enough’.
Two, because the issue has become extremely political. The Labour party ran an election campaign based around increasing levels of public spending – removing the pay cap, keeping the state pension triple lock, ditching tuition fees – all things that government has been saying for years that we simply cannot afford.
Many people still believe we cannot – but it has brought the debate back to the fore.
With the Labour party doing better in the recent election than most people expected, the Conservative party is having to do a lot of soul-searching.
If it continues with its agenda of cutting the deficit and reining in budgets, at what cost to the popularity of the party and the household budgets of millions?
Or if it softens its stance on spending, will it have exposed the country to reckless profligacy and given up on its ‘long-term economic plan’ that for years it claimed was the tonic to get the public finances back to good health?
Would you pay more in taxes to pay for public services?
This is the question that the Chancellor asked on Monday night at a CBI dinner. He said: ‘The serious question to the electorate cannot be "would you like us to tax someone who isn’t you to pay for you to consume more?", but "would you be willing to pay more tax to consume more public services?"’
Households cannot just hope that someone else – big corporations, the wealthiest – will cough up for the lot, we’re all going to have to share the load.
He added that there had to be a recognition that simply borrowing more amounted to ‘passing the burden on to the next generation’.
This question is quickly becoming one of the most important of our times.
We live in an ageing society, where the amount we need to spend on pensions, health and social care will only continue to rise.
This leaves us with two choices: we continue to pay the same level of tax and accept that our public services offer less, or we pay more tax and maintain public services at the same level.
It’s often thought that voters will simply not vote to increase the tax burden, making it very difficult for any party to suggest it.
However a recent poll by the British Social Attitudes report, found that almost half of Britons think the government should raise taxes and increase spending.
Just four per cent said they wanted to see taxes and spending on health, education and welfare cut, while 44 per cent said the levels should remain the same.
This Is Money also recently ran a poll asking a similar question (you can still vote in the poll above). When asked ‘would you pay a higher tax rate to help the NHS and Britain’s other problems’, 32 per cent said yes, 35 per cent no and 33 per cent said ‘I pay enough already to do it’.
The proportion of people who believe government should increase taxes and spend more has been rising