The lump of unmotivated labour

14 July 2015

George Osborne has always sought to prioritise spending reductions in working age welfare over public services. Last week Charlotte Pickles amongst others set out the dangers of his approach on the welfare side. The balancing danger is that he doesn’t push hard enough for change on public services.

In a key section of his Budget statement, he aimed for a relatively high employment, low wage public sector. He said that there was a trade-off between jobs and wages in the public sector, and announced a 1 per cent cap on public sector pay rises. In fact the public sector needs to shift towards higher productivity and, if so justified, higher wages. The Chancellor risks a lump of unmotivated labour in public services. Curiously, for the rest of the economy, he is arguing that higher wages and productivity can go together.

It isn’t easy for the Treasury. It doesn’t have adequate financial information on the costs of public services. It is very hard for it to sign off on transformational ideas, in particular in welfare, health and criminal justice, which seek to spend money in new ways with the aim of achieving big long term savings. Nevertheless these are the programmes which the public sector needs. The 2013 Spending Round tried to accelerate that thinking with three special funds (health and social care integration, policing and local government). Let us hope that there is still interest in these ideas, which will emerge in the Spending Review, showing that the Treasury is willing to look beyond blunt instruments such as pay freezes.

Some of the commentary on the Budget argued that the Chancellor is seeking to achieve a “small State”. In a leader on Friday (£), the Times praised the Chancellor for delivering a “larger plan to cut spending [and] shrink the State”. The Chancellor is certainly bearing down on some public spending but in other areas, including wages policy, he is now increasing the role of government. As a former Treasury official once said to me, “when governments can’t spend, they regulate”. Furthermore I would expect the Chancellor to support much higher spending on public services if tax revenues bounce back by more than expected.

Andrew Haldenby, Director, Reform

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