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How regional public sector pay will cost us all

Duncan Weldon explains how implementing regional public sector pay could cost the economy almost £10bn a year.

When is 0.4% a lot?

Research released this week by the New Economics Foundation (Nef) found that implementing government plans to move to regional, rather than national, public sector pay could cost the economy almost £10 billion a year.

The research is especially important as the government still hasn’t carried out any serious analysis of its proposals. Nef’s research, funded by the TUC, found that, in the worst-case scenario, the sucking of hundreds of millions of pounds out of local economies – as pay was cut – could cost the economy £9.7bn and lead to as many as 110,000 jobs being lost.

Even in the ‘best’-case scenario – where Nef assumed that ministers are right and the pay of public sector workers is preventing the private sector from recruiting as they can’t match public salaries (extremely unlikely to be correct) – the overall impact on the economy would still be negative, with national income reduced by £2.7bn and only 11,000 jobs created.

£9.7bn, the impact of the worst-case scenario, is about 0.43% of GDP. 0.43% might not sound like very much – it is, after all, less than half of one per cent. But here's why it matters.

This week also saw the release of the latest IMF forecasts for the UK economy. The IMF expects the UK economy to grow by just 0.2% in 2012 and by 1.4% in 2013. In other words, the impact of moving to regional pay is twice as high as the total growth expected this year. It would knock around a quarter off growth in 2013. This is big.

Regional pay could not only mean weaker growth, it could also entrench regional inequalities and add to the ongoing squeeze in living standards.

It is also self-defeating. When the economy is depressed (and we’re in the longest slump in modern economic history) anything that sucks spending out of the economy will lead to lower growth and a higher deficit.

Cutting people’s pay means that they’ll spend less – and less spending means weaker businesses, higher unemployment, lower tax revenues and more social security spending.

Lower growth, a bigger squeeze in living standards, greater regional imbalance and no progress on the deficit – it’s really hard to see what the case for regional pay actually is.

Duncan Weldon is senior policy officer at the TUC and blogs at Touchstone.

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