Duncan’s Economic Blog

A Pay Freeze?

Posted in Uncategorized by duncanseconomicblog on July 6, 2009

I have been reading Audit Commission Chair Steve Bundred’s thoughts on reducing debt.

 Red meat of course for the Telegraph:

 It has been left up to a civil servant, Steve Bundred, chief executive of the Audit Commission, to name a sum. He said yesterday that the national debt will require a £50 billion package of spending cuts and tax rises. Health and education could not be ring-fenced – and a pay freeze should be imposed on six million public-sector workers.

 By my count that would be a structural deficit around 3.5% of GDP – possibly a little low.

But the key question for me is, when does Mr Bundred suggest we make these £50bn of cuts?

If we make them this year we risk an exact repetition of mistakes made seventy years ago – the dreaded double dip recession. One of the most important lessons of the depression is that fiscal and monetary stimuli should not be withdrawn too quickly.

Let me be clear on this. If we announce a public sector pay freeze starting this Summer, that would be a colossal policy error.  A £5bn reduction in public spending, in the context of a deficit of nearer £200bn is small change in terms of savings. In terms of the effects on growth it is potentially much bigger. And the best way to pay down debt is growth.

11 Responses

Subscribe to comments with RSS.

  1. newmania said, on July 6, 2009 at 8:30 am

    I think you are being harsh on Mr . Darling who is trying very hard to overpay people and waste money but can hardly do so as much as you would prefer .
    So Duncan now it is clear you are at odds with the Labour Party as well as the rest of the sentient Solar system does it start to feel a it lonely out there ?

    • duncanseconomicblog said, on July 6, 2009 at 9:24 am

      And from the inbox, Capital Economics (Roger Bootle’s lot):

      The creation of new money by central banks is a sideshow compared to the disinflationary pressures still building in the real world. In particular, the risk that falling wages will trigger a deflationary spiral is far greater than the inflationary threat from the monetary side.

  2. charliemarks said, on July 6, 2009 at 9:14 am

    Oh, Newmania… try reading this post again.

  3. pablopatito said, on July 6, 2009 at 9:26 am

    Regardless of the economics of it, its just wrong to give public sector employees pay rises whilst the private sector has a pay freeze (if they’re lucky). Why can’t government borrowing be used to promote growth through subsidising small businesses rather than to pay the public sector? I don’t understand.

    And all cuts are “small change in terms of savings” when viewed in isolation. But look after the pennies etc etc…

  4. newmania said, on July 6, 2009 at 9:48 am

    Charlie The Guardian and her majesty’s Daily Telegraph both say Darling is planning a pay freeze and hopes to get £6 billion out of it. This was after the Audit commission joined the cacophony of abuse aimed at the Big lie of the Labour position .

    It would appear Duncan is at odds with the Labour Party ( or have I missed the point ? Its no unknown …ahem)

    • duncanseconomicblog said, on July 6, 2009 at 10:02 am

      Duncan disagrees with Government: shock.

  5. newmania said, on July 6, 2009 at 11:16 am

    Only by accident

  6. Paul said, on July 6, 2009 at 11:16 am

    I do note a bit of groundswell amongst the commentariat for a more sensible economic policy ie. not cutting now and creating a depression. Will Hutton is sheep-like, though he does a good job at then pretending to be an opinion former, so I thought his piece in the Observer yesterday, with policy recommendations diametrically opposed to Steve Bundred’s were signfiicant. There IS still time for the government to shift properly and put clear water between itself and Tories. All on the Will Hutton bandwagon badwagon, I say.

    I wonder if he’ll be there on Saturday at this Progress Conference.

    On another though related topic, Duncan, I’d be interested in your take on a couple of the comments on my crosspost at Liberal Conspiriacy over the weekend. In particular, I’d be interested in your views on how the equality-based approach to sustainable growth is actually a reach back to people like JA Hobson (before Keynes) in its underconsumption thesis (see Reuben’s comment) and how this relates to Tim Worstall’s accusation that what you (and I on the Duncbandwagon) are proposing is actually anti-Keynesian in its ignorance of the IS/LM model. I’m not suffficiently trained to takeTim on in purer economics theory (as opposed to political economy), though I have a feeling the answer is about it all being relative, and that the underconsumption/overinvestment remedy approach (paying people properly) reduces some of the more conspicous investment potential (that being a good thing in terms of re-engineerere/greened suplpluy side strategy, it helps focus on more socially useflu investment and by a wider range of people/organisations (there’s also a tie to my post on Phillip Blond’s asset-not-money stuff in there).

    Have a couple of thousand words on my desk by tea time, if you would. Good lad.

    • duncanseconomicblog said, on July 6, 2009 at 11:24 am

      Paul,

      I have huge problems with the IS/LM model. In fact you raise issues that I think will make for a good post. That’s the inspiration for tomorrow then. Thanks.

      I reserve the right to blame ‘homework for Mr Cotterill’ when my better half complains that I’m spending the evening reading Keynes, Hobson and Robinson.

  7. Paul said, on July 6, 2009 at 12:02 pm

    I look forward to it. Hobson’s 1933 underconsumption paper is at http://www.marxists.org/archive/hobson/1933/11/underconsum.htm by the way. It’s tough going I found but only because of the very 1930s style – well that and my not being an economist.

  8. […] 6, 2009 · Leave a Comment Duncan criticises the economics of the proposed public sector pay freeze. Nigel criticises the equity. I’m inclined to […]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: