UK PM Sunak has weak hand on strikes and should settle, economists say

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Two senior economists warned the UK government is fighting a losing battle with unions over public-sector pay that will only extend strikes and delay wage inflation because the bargaining position of workers is too strong.

Charles Goodhart, a former Bank of England policy maker and professor at the London School of Economics, said politicians will condemn the UK not just to a “winter of discontent” reminiscent of the 1970s but “a year of discontent unless they agree a wage deal to end the ongoing industrial action.”

Savvas Savouri, chief economist at Toscafund Asset Management, said the government is “delusional if it believes it has “a strong hand against whichever union happens to be their adversary.

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The views from the economists also feed into the debate about how to bring inflation under control after it jumped to a 41-year high of 11.1 percent.

The Bank of England has raised its benchmark lending rate to 3 percent last month and is expected to move again next week and in February to prevent a wage-price spiral. It’s called on employers to restrain pay demands, embedding the tightest cost-of-living squeeze on record.

Prime Minister Rishi Sunak’s position is unusually weak. After key workers were applauded for their service during the pandemic following years in which their pay had fallen behind the private sector, the public is sympathetic to the strikers’ demands. Also more than 600,000 workers have dropped out of the labor market since the pandemic, leaving employers struggling to fill vacancies.

Strikes are planned for every day until Christmas, with nurses, ambulance staff, teachers, rail and postal workers demanding pay rises to match inflation. They argue they’re seeing real-terms pay cuts after more than a decade of restraint.

The government has agreed 5 percent pay rises on average for public-sector workers, below the 6.8 percent average across the private sector, in an attempt to prevent a wage-price spiral and because the public finances are in a precarious state. Every 1 percent increase in public sector pay costs roughly £2.5 billion ($3 billion).

If the strikes continue, Savouri said the economy will suffer further supply shocks and staff shortages, and in itself will fan the pricing pressure that the government and Bank of England are trying to prevent.

“Wage growth will prove more stubborn, and so too inflation,” he said.

Similarly, Goodhart said the tide cannot be held back. The government’s stance “is not going to succeed, and it’s not going to last,” he told the Bank of England Watchers conference last week. A “public sector wage explosion is inevitable by 2025 at the very latest.”

Part of that is because government workers for years have been falling further behind their counterparts in the private sector on wages and pay raises.

The government may well have to give way to fill vacancies, especially in the National Health Service, which is suffering chronic staff shortages. Pay restraint over the past decade has taken its toll on the ability of public services to retain staff.

In a note published Monday, Savouri said private employers are paying up “through gritted teeth and urged the government to follow suit.

The state should offer an 8 percent to 10 percent pay rise this year tied to a deal over the subsequent four years for a total increase across the five years of around 18 percent, he said. The arrangement would effectively mean fixing pay rises from 2 percent- 2.5 percent from 2024 to 2027.

His proposal would cost the government an extra £7.5 billion ($9 billion) to £12.5 billion (15.1 billion) this year, which is roughly the same as the extra headroom against its fiscal rules created by lower projected interest rates since the November autumn statement.

The Treasury declined to comment but pointed to cabinet minister Nadhim Zahawi’s statement to Sky News on Sunday.

“If you chase inflation — or above inflation — pay rises, then you embed inflation for longer and hurt the most vulnerable. This is not the time to strike but to negotiate,” he said.

Ministers have asked the independent Pay Review Bodies to make recommendations for next year’s awards, which will be announced in the summer.

A generous upfront deal would end economically damaging strikes and help ease labor shortages by “encouraging European Union nationals with settlement status who departed our shores at the onset of COVID lockdowns to return,” Savouri argued.

“The reality is we need to see a noticeable one-off rise in the wage level to quickly inject a fresh supply of workers into the UK,” Savouri said.

“This would deliver a host of disinflationary benefits, not least stopping supply-restricting – and thus inflation fueling – strike action.”

Goodhart said the government’s determination to pin down public sector pay was a “form of prices and incomes control” that is causing “all kinds of mayhem” – a combination of declining recruitment, worsening services and increasing industrial strife.

“The pressures imposed are so great there is going to have to be a public sector wage explosion, certainly no later than the next general election when the incoming government is going to have to rectify the distortions that are already there.”

The government must call an election by January 2025 at the latest.

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