Recent weeks have seen the issue of the public sector pay cap re-surface and several Cabinet members have suggested they would be open to taking another look at the topic. Comment from Daniel Mahoney, CPS Deputy Director and Head of Economic Research.

However, “Abandoning austerity is no solution“, published by the Centre for Policy Studies on Thursday 13 July 2017, suggests the government should not abandon its deficit reduction targets or make significant increases in tax in order to lift the cap or increase departmental spending. The CPS analysis also shows that for those OECD countries with a high budget deficit in 2010 (over 5 percent of GDP), there is a strong correlation between bigger spending cuts and achieving a larger reduction in the deficit, higher average growth rates, a larger fall in proportionate unemployment and marginally better wage growth.

Daniel Mahoney, CPS Deputy Director and Head of Economic Research, comments:
“There is now huge pressure for the Government to implement significant increases borrowing or taxation. This must be resisted. “The UK’s deficit reduction programme is already modest and the tax burden already very high. While there might be a case for easing the one percent pay cap on public sector pay or easing constraints in some government departments, the only responsible way of doing this would be to re-gear government priorities by, for example, making savings in areas that have recently seen large increases in spending such as the international aid budget and pensioner benefits. Of course, another possible way out for the government could be to further extend regional pay for public sector workers to areas outside London.

Our research also shows that, when examining OECD countries that were left with large budget deficits in 2010, there is a strong correlation between higher cuts to public spending and positive economic outcomes. Of course, correlation does not necessarily mean causation. However, this provides strong evidence that there is no link between austerity and lower growth, higher unemployment and weaker wage growth.

It is also notable that many countries have seen a much larger fiscal consolidation than the UK, and achieved much better results. For example, Ireland’s fiscal consolidation has been 2½ times the level in the UK, while seeing a larger fall in its deficit, debt and unemployment while achieving marginally better wage growth.”