William Eichler 13 July 2017

Don’t ‘abandon’ austerity, free market think tank says

‘Abandoning austerity is no solution’, says free-market policy think tank amid calls to lift the public sector pay cap.

In recent weeks several cabinet members have suggested they would be open to taking another look at the pay cap which restricts public sector pay to a 1% rise each year.

The cap is a part of the Government’s wider policy of austerity, which is designed to reduce the country’s deficit through cuts in public spending.

However, the Centre for Policy Studies (CPS), a think tank dedicated to reducing the size of the state and leaving the delivery of services to the market, has warned against ‘abandoning austerity’.

‘There is now huge pressure for the Government to implement significant increases in borrowing or taxation. This must be resisted,’ said Daniel Mahoney, CPS deputy director and head of economic research.

‘The UK’s deficit reduction programme is already modest and the tax burden already very high.’

According to Carl Emmerson of the Institute for Fiscal Studies (IFS), the Government’s deficit increased from 2.6% of national income to a post Second World War high of 9.9% of national income in 2009–10.

The result of a global financial crisis, which was created by a deregulated banking sector, the Government has reduced this deficit to 2.4% of national income in 2016–17 through a combination of tax increases and cuts to public sector spending.

Mr Mahoney’s call for more austerity is based on what he describes as ‘a strong correlation between higher cuts to public spending and positive economic outcomes’ in other OECD countries that were left with large budget deficits in 2010, although he acknowledges correlation does not mean causation.

Mr Emmerson’s report for the IFS points out that while the deficit has been reduced ‘the economy is far, far smaller than expected’, suggesting austerity has reduced the deficit but not improved the country’s economic performance.

On the question of the pay cap, a report from the Institute for Fiscal Studies (IFS) recently warned freezing public sector pay — which effectively is what the 1% pay cap does — was having an impact on recruitment in the public sector, particularly in the NHS and education.

‘In the long run, public sector pay will need to rise in line with private sector pay for the public sector to attract the skilled individuals needed to administer and deliver public services,’ the IFS report summary said.

‘While there might be a case for easing the 1% pay cap on public sector pay or easing constraints in some Government departments,’ said Mr Mahoney, ‘the only responsible way of doing this would be to re-gear Government priorities by, for example, making savings in areas that have recently seen large increases in spending such as the international aid budget and pensioner benefits.

‘Of course, another possible way out for the government could be to further extend regional pay for public sector workers to areas outside London.’