Senior members of Boris Johnson’s government say a looming clash with public sector workers is one of the biggest risks to the UK’s economic and political stability, with anger over pay building towards a wave of industrial action.
A nationwide walkout due to cripple rail services next week has been billed as the start of a “summer of discontent”. In the public sector, unions representing teachers, junior doctors, civil servants and local authority staff are moving towards strike action. Binmen and bus drivers are already on strike, while criminal barristers and postal workers are set to vote on action.
Ministers fear that a confrontation over pay with public and quasi-public sector workers — who are suffering much bigger real terms wage cuts than their private sector counterparts — could either tip a faltering economy into recession or blow a hole in the government’s spending plans.
One cabinet minister said the government was walking a “delicate tightrope” of keeping pay down and avoiding an inflationary wage spiral without forcing multiple sectors on strike: “If we get this wrong, we risk going into a de facto general strike that will create further turmoil that risks grinding the whole economy to a halt.”
Another senior minister said the government “will have to hold the line, no matter how hard it gets” in pay negotiations, adding: “It’s going to be tough but we can’t go back to 8 or 10 per cent wage increases as we saw in the 1970s.”
Economists say the direct impact of strike action on the economy will be limited. Despite parallels with the 1970s — when industrial unrest spread from coal miners to gravediggers — unions can no longer shut the economy down, with a much smaller membership concentrated in the public sector.
But there is much at stake for public services and the public finances at a time when many Tory MPs want to prioritise tax cuts over extra spending.
Wage deals for public sector workers lag far behind those on offer in the private sector, where many employers have been paying big bonuses to keep scarce staff. Official data shows average total pay growth for the private sector was 8 per cent in the three months to April, compared with 1.5 per cent in the public sector — one of the biggest gaps on record.
The government has been trying to keep imminent pay settlements to just 2 per cent, or 3 per cent in some instances, arguing that going any further would set a benchmark for inflationary pay deals across the economy.
Paul Johnson, director of the Institute for Fiscal Studies, said if the Treasury enforced this limit, as inflation nears double digits, it would double the real terms pay cut many public sector workers have already suffered since 2010. This would cause big problems for recruitment and retention, on top of the risk of strikes shutting down schools and hospitals.
A pay rise that came anywhere near matching inflation would cost an extra £10bn. Because spending plans were set in cash terms, when inflation was expected to be much lower, departments will not be able to keep pace with rising prices without compromising the delivery of public services — unless the Treasury finds more money.
“This is the biggest problem for the government this year, the most difficult decision,” Johnson, from the IFS, said.
Although next week’s rail strikes will do less direct damage to the economy than past disputes — most goods are shipped by road and many commuters can work remotely — business leaders are acutely worried by the prime minister’s willingness to court confrontation.
“We’re expecting the economy to be pretty much stagnant. It won’t take much to tip us into a recession . . . We’ve had weeks of politicking with the country standing on the brink of a summer of gridlock,” said Tony Danker, director-general of the CBI business, the employers’ organisation, which has called the rail strikes “particularly regrettable at a time when the economy is under such strain”.
Neil Carberry, chief executive of the Recruitment & Employment Confederation, said that, with both employers and workers facing soaring costs, strikes could also become more frequent in the private sector: “In any unionised workplace there is going to be a higher risk of a dispute in the next year or two than there has been for a couple of decades.”
Business groups add that their members are reporting a sharp pick-up in union activity, although private sector employers have often proved more willing to strike deals on pay before disputes reach the point of industrial action.
Even where unions are not involved, workers are increasingly able to secure better terms and pay in a labour market with as many vacancies as there are people out of work.
The Bank of England said on Thursday that companies were still struggling to hire, despite slowing economic growth, and were offering pay deals averaging just over 5 per cent, with a significant minority of companies considering mid-year top-ups as the cost of living rose.
Brian Reading — who served as economic adviser to prime minister Edward Heath in the run-up to the miners’ strike of 1972 — argued in a recent paper that the decline of trade unions would not stop workers securing inflationary wage deals at a time of widespread labour shortages.
“Private sector unions are less aggressive today, but scarce skilled workers are more powerful,” he wrote. “Public sector workers have popular support . . . Cheap labour is no more.”