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Strike Risk As 'golden Rule' Gets A Rethink

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The Chancellor's plan to overhaul his borrowing rules could pave the way for a slew of higher wage claims in the public sector and set the stage for a major clash between Government and unions, it has emerged.

Unions said last night that Alistair Darling's decision to reconsider the golden and sustainable investment rules strengthens their hand in ongoing pay negotiations for state workers.

They urged the Chancellor to raise his borrowing limits and scrap the ban on using borrowed money to fund public sector wage increases.

The news sparked warnings from economists that giving in to higher public sector wage deals could help trigger higher inflation and interest rates, and could ultimately plunge the UK into recession.

Either way, this year is likely see the most industrial action since the 1980s, they said.

Gordon Brown has insisted on pegging wage rises for millions of public sector workers at around 2pc - the inflation target set by the Bank of England.

The move has sparked a series of strikes, including one by 600,000 local authority workers last week over their 2.45pc pay offer.

# More on economics

Tony Woodley, of Unite, the country's biggest union, said: "We have said that we are not going to let a pay cut be imposed on our members purely because of an economic crisis coming from elsewhere in the world.

"If a change to the Government's borrowing rules makes that easier then so much the better."

Adam Lent, the TUC's head of economic and social affairs, said: "This will absolutely strengthen our hand. If the Treasury is genuinely going to do a comprehensive review of those rules, then - given that one way to boost the economy is to ensure public servants have higher pay - it might be worth considering borrowing extra to afford this."

A spokesman for Unison said it would also reconsider its three-year wage settlement for NHS workers if inflation increases.

Ed Sweeney, the new chairman of conciliation service Acas, has warned Gordon Brown that his plan to limit pay rises will lead to further strikes.

With unions now given extra strength by the knowledge that the Treasury is considering relaxing borrowing rules, the clashes may intensify.

Peter Spencer, economic adviser to the Ernst & Young Item Club, said: "Public sector wages are critical to the path of the economy. Even if the Treasury relaxes the fiscal rules, it must hold down on public sector pay.

"If the Government caves in to the local authorities - if they got 4pc for three years, for instance - it would mean that inflation would go up and so would interest rates, and we would have to have a recession to undo the damage.

"We would be talking not just about the Government losing the next election but of Gordon Brown going down in history not just as the worst Prime Minister since the war but the worst Chancellor since the war. He will be blown out of the water, and if he is as keen on ensuring his legacy as Tony Blair he will be thinking about this."

Andrew Clare, professor at Cass Business School, said: "If you have a situation where they announce a huge increase in public sector spending, that might encourage the unions to push ahead with higher pay claims.

"If you had that and at the same time raised the Bank's inflation target," he said, "that would be disastrous for credibility."

I don't think any other routes work particularly well.

He needs to rapidly shrink the public sector headcount and reduce spending to sort out the public finances as economy slows but this would just drag on aggregate demand exaggerating the slowdown. Governments don't do this as so they just expand deficits. They have to get re-elected!

Capping wages below inflation will also drag on demand. Allowing wage growth to take off will raise interest rates as the article mentions.

Not sure about changing the inflation target.

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Not if Labour are going to operate a scorched earth policy.

Borrow more, unions go on strike for higher wages, govt then gives all public sector workers 10-15% pay rises just before next election. The election may be tighter but Labour will still lose and the Tories have the problem of paying for it all.

I would also expect those who agreed to around 2% rises over the next 3 years to go on strike as well seeing as the BoE as failed to deliver 2% inflation they have ever right to try and get more to cover their costs.

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and could ultimately plunge the UK into recession.

I do wish the press would avoid these instant access single button nonsense phrases

........ especially when they are out of date!


Let the public sector go on strike.

Bring on the resentment, let it burn out.

Then spell out the stark grim (globally caused) reality of the new Britain.

Coalition Govt. anyone? --- maybe not with the present egos

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