Newspaper article The Evening Standard (London, England)

Public Sector Pay and the Spectre of Stagflation

Newspaper article The Evening Standard (London, England)

Public Sector Pay and the Spectre of Stagflation

Article excerpt


PEOPLE who do not remember the 1970s assume that if the economy is slowing down, you cannot have inflation. But you can, and we did.

All the more alarming, therefore, to read over the weekend that inflation is returning to the public sector.

While all eyes have been focused on the retail prices index because that is what those who set interest rates use to measure their achievements, and while it has been relatively benign, inflation in the public sector has taken off.

We should not be surprised because when money is poured into public services, most of it is mopped up in wages and very little flows through into clearly measurable improvements in services. So not only is public sector recruitment the only part of the job market to boom at the moment, but public sector wages are also soaring.

The most accurate gauge of public sector inflation is for some reason known as the GDP deflator for Government consumption. In the five years to 1998, it rose by 2.2% a year.

By the end of 1999, it was running at 4%, rising to 5.75% in 2000. In the last financial year to the end of last March the figure was 6.5%.

According to Michael Sanders of investment bank Schroder Salomon Smith Barney, in the first quarter of this year public spending rose at an annual rate of 11%.

But 59% of this sum was eaten up by higher wages and prices, so the effective rate of increase in spending was only 4.2% year-on-year.

This, of course, makes it highly unlikely that the public will see any significant improvement in the quality of services and the Government (or the taxpayer) will see very little effective return for that mountain of extra spending.

The longer-term economic implicationsare probably even worse than the short-term ones.

Historically, wage rises in the public sector filter out into the private sector and lead to a parallel surge of inflation there. …

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