Jun 252010

Well we have had the emergency budget and one of the announcements was a two year public sector pay “freeze”. Of course in reality it is a pay cut because of inflation. Of course if politicians were a little more honest they would actually announce it as a pay cut by freezing cost of living increases; one minor sign of improvement was when the prime minister admitted afterwards on a debate with the public that it was actually a pay cut. After all in the past, politicians have blindly and foolishly proclaimed that a pay freeze was not a pay cut at all.

For those that doubt that it is a pay cut, take a hypothetical public sector worker who earns £20,000 a year and who spends every pound on buying a £1 loaf of bread. This is of course ridiculous, but makes the arithmetic easier. Now let us assume that the current UK inflation rate is 3% (it’s actually a smidgen higher) and stays that way.

In the first year our hypothetical worker can buy 20,000 loaves of bread.

In the second year, the price of a loaf increases by 3% to £1 * 1.03 or £1.03. Because our worker has not had a pay increase, he can now afford just 20,000 / 1.03 loaves of break … 19,417 loaves of bread. In the third year, the bread goes up yet again to £1.06 and the number of loaves our worker can buy drops again to 18,867.

In a very real sense the value of the work that our worker does for the public is being nibbled away year by year. And don’t forget that it lasts until the cost of living increases above inflation eventually restore the value. Sure our worker still gets £20,000 a year, but the value in money is not the in the symbol printed on the bank note, but in what it can be exchanged for.

Whilst the government has plenty of reasons to reduce government expenditure and reducing the total public sector pay bill is perfectly reasonable, the way it was done is a little old-fashioned. One of the noticeable things about the similar efforts in the private sector in this recession as compared with previous recessions has been the amount of negotiation involved. More enlightened managers have negotiated with the workers to find a mutually least disagreeable way of reducing the cost of salaries.

Sometimes this has meant a number of voluntary redundancies; sometimes a cut in the hours worked with an associated pay cut, and sometimes it has been a simple pay cut. Or a combination of all three.

Why hasn’t the government tried a similar path with the public sector workers ? After all, these things can be negotiated. One obvious compromise is to not only freeze the pay, but also to reduce the standard working week every year by the amount of inflation. This is still a pay cut, but at least values the work of the public sector worker the same – it gives the public sector worker something in exchange for less pay – a shorter working week.

By imposing this pay cut without negotiation, the government is behaving like an old-fashioned tyrannical employer who treats their workers like wage slaves.

And where does this idea that all public sector workers get gold-plated pensions from ? Sure many get final salary pensions which in the majority of the cases is not a spectacular amount. Despite the demonising propaganda floating around in the press, most public sector workers do not earn immensely large salaries; on a personal note, I earn roughly half what my brother earns for roughly the same job – and that excludes his yearly profit bonus.

Fact is that the private sector has slowly been dropping final salary pension schemes for years without any great reflection on whether this is necessary to ensure pensions are affordable, or whether this is a means to ensure fatter profits for the fat cats. And yet still there are a significant number of private sector firms that offer final salary pensions.

The targeting of public sector pension schemes by the right-wing fascists is little more than playing up to the insecurities of private sector workers who have been deprived of their final salary pension schemes.

As someone mentioned on a TV debate on the increase of the pension age to 66 in 2016, we not only need a review of government provision of pensions (to both the workers in general and the public sector workers), but we also need a review of how pensions are paid for in the private sector. We are a richer society now than we were 20 years ago, but pensions are less generous.

Is this simply because people are living longer than they used to, so pensions cost more ? Or is there something else at work ?

In dealing with pensions, I have more questions than answers but it needs some serious thought about how pensions can be paid for. Can we as a society really not afford to pay pensioners a decent pension ? We have a belief that the wealth created by private sector workers belongs to the entrepreneurs who risked everything on setting up a company. But all too often these entrepreneurs are merely managers of very large companies that are risking very little. That is not to say that genuine entrepreneurs do not exist, but the assumption that every head of a company is an entrepreneur is wrong; indeed the ones who earn the most are rarely the ones who risk much.

This is beginning to sound like I am in favour of some kind of old-fashioned hard left socialist state. Not at all, but the belief that the free market can solve everything is just as foolish a belief.

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