Should public sector workers get bigger pay rises?

The reports of the public sector pay review bodies are arriving across Whitehall right now, with the potential to become both economic and political dynamite.

They cover eight areas and just under half the public sector workforce but it may be the case that the evidence submitted, mainly at the turn of the year, is already out of date.

Inflation is on a march. But as Treasury Minister Simon Clarke told me last week, and reiterated yesterday, there is no automatic link in the Treasury's view between the rate of inflation and wage settlements.

In private, senior Cabinet ministers go further, saying that matching wages to inflation would be dangerous and damaging - even suggesting such a thing is irresponsible.

They point to two factors around a significant real terms pay cuts for NHS workers, teachers, police officers and council workers.

The bulk of the 9% current rate of inflation, as measured by the Consumer Price Index, is driven by energy price rises.

The Government has already announced support for energy bills for millions of households, especially those on lower incomes. It also points to early indications of private sector wage growth at around 4-5%, as a more relevant metric.

There are two counter arguments here Firstly, those payments, which cover almost all the cost for several million households, are currently a one-off. Second, public sector pay has fallen overall since 2010 already, and there are some recruitment challenges already affecting some provision of services.

Furthermore, state pensions and some benefits are pegged to the prevailing rate of inflation, and that potentially huge increase will be delivered next year, under current plans. Other bills are also linked to inflation, such as mobile phone and broadband payments.

Public disputes

Unions have asked for pay rises reflecting the current huge spike in inflation. Unison, for example, has asked for rises to match the higher Retail Price Index measure of inflation at 11%. Nurses have asked for 15%.

Our Cost of Living survey last week suggested eight in 10 Britons thought that wages should go up with the cost of living.

Fewer though - just over a third of workers - said they would push their employer for such a rise. Unions also face some difficulties in reaching new thresholds required in ballots for legal strike action on a national basis. Though the RMT did manage to clear such hurdles to go ahead with the rail strike.

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Then there is the more general argument about a 1970s-style wage-price spiral emerging. Certainly the last time inflation reached double digits in the 1970s when inflation topped over 20%, and in some years wage inflation was 30%.

Prices went up in anticipation that wages would, which in turn increased because of expectations of price rises, and so on and so forth. This was the classic wage-price spiral that saw the period of very high inflation last years rather than months.

There is some evidence that this is happening in the US. But not much so far in the UK, where prices certainly have spiked and wages haven't - though that could change. There are structural reasons for this.

Union membership has fallen from 13 million at the 1970s peak to six million now. While the Government privately accepts that the numbers affected are small in relation to the whole economy, there is a "signalling effect", they argue, from high profile public disputes.

We are obviously a world away from Downing Street slapping down the Bank of England Governor after my interview in February, where Andrew Bailey warned workers not to ask for excessive pay rises. And significant in-year real wage cuts may leave some voters who were promised a "high wage" economy a little short-changed.

But the Treasury insists there is no "central pay" policy. The result of the Pay Review Body process is for relevant departments to make decisions, based on recruitment and retainment and existing policies on, for example, starting salaries for teachers.

The important fact here though is that the Treasury is not intending to increase the cash budgets for departments. If they want to find funds to increase wages against Spending Review plans, they will have to find it in efficiency savings or cuts in their own departments.

It is time for Cabinet ministers who like to talk about a smaller state and tax cuts to show how they intend to contribute, say some of their colleagues.

All of which leaves unions claiming their members are ready to move towards industrial action across a range of public services. At a time of labour shortages, some union leaders believe they will never have more leverage to force their wages higher, and that there will be post-pandemic public sympathy for their asks not to see a cut to living standards.

The Government will argue this way lies the inflationary dangers of the past.

But for many of the workers concerned, it is not just that their memories have faded - they were not even born the last time inflation hit double digits. So for many, we are in uncharted territory.