Why a planned public sector pay freeze means there’s trouble ahead

Making public spending cuts now risks the economy; cutting later risks the government’s political survival. Sean O’Grady explains why the government cannot win

The chancellor and the Tories are in a bind (AFP/Getty)

Given the damage that the Covid crisis has inflicted on the economy and the public finances, and the prospective hit to come from Brexit, it is not so surprising that the chancellor will take the opportunity of the spending review next week to indicate how he will start the long slog towards fiscal health. As the latest figures show, borrowing is at record levels for peacetime, and the national debt is approaching the peaks it hit just after the Second World War (in proportion to national income). Well over £200bn in public money has been expended in protecting jobs and the economy. While interest rates and inflation remain at historic lows, there seems no great urgency to paying down debt; indeed there is not, but the government wants to start to turn  the corner on borrowing and start to reverse the trajectory, circumstances allowing.

The British state spends about £200bn a year employing 5.3 million people, mostly in health and education. The pay bill is thus an obvious candidate whenever a hard pressed government is looking for savings. A Conservative government might also be traditionally expected to bear down on public spending rather than raising taxes. The government has made a manifesto commitment not to increase the rates of income tax, national insurance and VAT, the biggest source of tax revenues, which limits its freedom of movement (though thresholds could be frozen and other adjustments made to increase the tax take). Some promises to increase public pay and recruit more staff were also made, but they are the more politically vulnerable to reversal.