It’s not every day that I find myself agreeing with Jean-Claude Trichet, President of the European Central Bank (ECB). But Mr Trichet’s call for public sector pay restraint to help to curb mounting government borrowing in the euro economies brought a “hear, hear” to my lips.

While it’s a good thing that UK economic policy is not constrained by the ECB’s monetary regime, in the depths of recession ministers ought to follow the lead set by many private businesses and freeze the pay of the 5.8 million workers employed on the public payroll.

The imminent arrival of deflation is not only an extraordinary occurrence but also changes the rules of the game of pay setting.

The retail price index remains the principal inflation benchmark used by employers. Although pay is normally “sticky” during economic downturns – it doesn’t fully adjust downwards in response to lower price inflation – deflation presents employers with a dilemma. It makes it easier to suggest pay freezes as a reasonable option to staff otherwise threatened with redundancy. Consequently, deflation could result in the equally extraordinary zero pay increase.

This outcome is most likely in the private sector, where demand is falling, profits are being squeezed and there is little trade union presence. Things are different in the public sector, where pay is rising relatively fast – at the end of last year average earnings were growing at 3.9 per cent in the public sector and 3.5 per cent in the private sector – but at a time of considerable strain on the public finances the Government should take advantage of any period of deflation to freeze public sector pay, too. If the Government can make savings on its pay bill – which accounts for about a third of state spending – the easier it will be to fund measures aimed at tackling unemployment without adding to public borrowing.

One wonders why the Government isn’t doing this. It can’t be because public sector workers are considered more deserving – although lots of public employees earn a pittance, pay rates and benefits, notably pensions, are generally lower in private sector jobs. It might be because the nature of many frontline public sector jobs requires a pay premium to attract and retain staff, although with the private sector job scene’s deterioration, recruitment and retention pressures there are muted.

It could be, instead, because policymakers reckon that a public sector pay squeeze would take spending power out of the economy and exacerbate the recession, a conclusion that only holds if one assumes that HM Treasury would pocket the saving rather than redirect it to struggling businesses or to stimulate extra jobs.

This leaves only one other explanation for the Government’s inaction – the possibility of strike action in the public services, where trade unions remain relatively powerful and capable of wielding considerable political influence. The unions have every right to try to gain substantial real pay rises for their members, but that shouldn’t prevent an honest and open debate on public sector pay at this time of economic crisis, nor deter the Government from acting in the national interest.

— John Philpott is chief economist at the Chartered Institute of Personnel and Development

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