The Times reported over the weekend that the government could overrule recommendations on public pay rises from the independent pay review bodies amid concerns higher wages could fuel rampant inflation.
The reports, which followed news that the Bank of England had raised interest rates to 5 per cent in a shock move designed to tame inflation, means millions of workers will have recommended pay rises of 6 per cent blocked by ministers. Yesterday, the PM doubled down, expressing concern that unaffordable public sector pay hikes could trigger a “wage-price spiral” and telling striking workers to “recognise the economic context we are in”.
This development is significant on a number of levels.
Firstly, while these pay review body recommendations — which cover around 45% of public sector staff — are not legally binding on the government, they are typically accepted. Their remit is proscribed by government, their chair picked by the PM and they take evidence from a range of sources, including from employers on issues relating to pay and retention.
Moreover, the government has in the past leaned on the work of pay review bodies to counter union demands. Back in December, ministers argued it was not for them to decide how much public servants should be paid, instead choosing to defer responsibility to the independent pay review bodies.
But now the argument is flipped on its head as the government seizes its responsibility to manage any trade-off between wages and inflation. And the issues this updated stance could cause Labour, one imagines, will have featured highly in the government’s thinking.
Indeed, it is no secret that the nature of the government’s new approach places political pressure on Sir Keir Starmer’s party.
Since the PM took over in October, Labour has sought to match Sunak’s seriousness on inflation. It begs the question: will Starmer accept the government’s view that the recommendations of the pay review bodies are inflationary?
In its initial response to the government’s pay review posturing, Labour conspicuously did not make a wholehearted defence of the independent body process. Wes Streeting, Labour’s shadow health secretary, instead insisted that the Labour party want pay review bodies “back up and running with the full confidence of everyone involved”.
Streeting once said that the recommendation from the NHS pay review body of an increase about 4.5 per cent in the summer was too low, telling the Times in December last year “we’ve got inflation running at record levels and there are cost of living pressures, particularly amongst lower paid staff.”
Also speaking over the weekend, shadow chancellor Rachel Reeves refused to rule out blocking public sector pay rises, saying Labour would negotiate a “fair and affordable” deal with workers. The shadow chancellor cited her iron oaths — Labour’s new fiscal rules — as a reason why a Reeves-led Treasury could block pay increases in line with recommendations.
It has been clear for some time now how significantly the fiscal rules feature in Labour’s economic pitch as they continue to condition the party’s policy platform. Indeed, Reeves previously cited her economic oaths during Labour’s tricky climbdown over its £28 billion green capital investment initiative. Asked earlier this month about the updated position on the so-called green prosperity plan, Reeves said: “I always said that our fiscal rules would be non-negotiable because they are the rock of stability upon which everything else is built”.
But Reeves’ fiscal rules are far from being so compellingly iron-clad to render the green prosperity plan in its former guise — or a 6 per cent pay rise for public servants — impossible on Labour’s terms. Fiscal Rule three, for example, that “Labour will have a target to reduce the debt as a share of our economy”, is really a rule to have a rule sometime in the future. In truth, any policy can be pitched or ditched based on a loose interpretation of the Labour’s economic oath-swearing.
Still, it has been a prominent feature of Sir Keir Starmer’s leadership that Labour now pronounces on issues that might otherwise be viewed as politically difficult for the party. By focussing on the economy, migration or law and order at prime minister’s questions in recent months, Sir Keir has intended to dispel any doubt that his party is serious on issues typically reserved for Conservative thought leadership. Given that Starmer wants to match and, even, outflank Rishi Sunak’s party on topics where a progressive party might reasonably be viewed as vulnerable, the party’s coy stance pay review bodies may be predictable.
Indeed, on pay review bodies, Labour is arguably doubly-exposed to Conservative attack. First, there is the charge of fiscal irresponsibility — that pay rises could lead to a wage-price spiral, fuel inflation and necessitate tax rises down the line. But more than this is that totemic criticism that Labour struggles to stand up to unions; it is an attack line which featured centrally in Conservative rhetoric during the passage of minimum service legislation through the commons earlier this year.
So with the Conservatives under pressure on the PM’s pledges, No 10 has identified an issue which could cause trouble in Labour ranks and allow Sunak to double down on some key attack lines. And perhaps we are already seeing some Labour freelancing on the issue. In her interview with Sky News yesterday, Emily Thornberry was withering over the government’s position on pay review bodies. “I mean, seriously — do they really have a policy at all?”, she exclaimed.
The shadow attorney general added: it was “only a few months ago that they said they couldn’t possibly pay out any more than the pay review bodies say, and today they seem to be saying they’re going to override the pay review bodies”.
Highlighting government inconsistency on political issues is of course exactly what you would expect an opposition party to do, but Thornberry’s line here was noticeably harder than that taken by Reeves or Streeting over the weekend.
In time, Labour may split more clearly on the issue — with Starmer finding himself at odds with the soft left elements of his shadow cabinet, potentially even deputy leader and friend of the unions Angela Rayner, on public sector pay. Those to Starmer’s left might be willing to make the principled progressive argument, insisting that public sector pay should be set at levels needed to attract and motivate the required staff and that an upsurge in inflation does not change that logic.
They may argue, moreover, that public sector pay may not actually drive inflation, given that public services like healthcare and education are free at the point of use. Increased producer costs on wages will therefore not inform the prices consumers pay directly. The caveat, of course — which figures like Reeves and Streeting may stress — is that an increase in public expenditure and borrowing to fund public sector pay increases could sprkr further inflationary pressure.
Amid his overarching aim to own the mantle of fiscal responsibility post-Corbyn and post-Truss, Starmer’s hands may be further tied here by the comments from Bank of England Governor Andrew Bailey. After hiking interest rates to 5%, Bailey last identified “unsustainable” worker demands as a factor fuelling inflation — hence raising the spectre of a wage-price spiral. Would Starmer be willingly complicit?
But economic theory aside, it is ultimately the political signals on public sector pay which are the primary consideration for Labour here. Indeed, with inflation set to be far lower by the next general election — even if Labour is forced to pronounce in government on the recommendations of pay review bodies, the picture may have changed drastically. What is said posturing in opposition on public sector pay, therefore, may have little implication for the policy programme of any Labour government.
What is undoubtedly true, however, is that Starmer has taken enthusiastically to exorcising Labour’s reputation as a party of profligate fiscal policy. Be it on tax rises, on the party’s green investment plan or on nationalisation — Starmerism seeks at every turn to neutralise Conservative attacks on Labour’s recent history of supposed economic irresponsibility.
Labour’s positioning on pay review bodies will hence be conditioned by this overriding strategical objective. In the end, any opportunity Reeves gets to tout her “fiscal rules”, any chance Starmer stumbles upon to underline his seriousness and upset his left flank — trust they will do so.