Britain’s New Austerity: A research brief

Britain faces a wave of strikes that has been likened to the 1979 ‘Winter of Discontent.’ Most industrial action is taking place in the public sector while what isn’t, is effectively quasi-public, like the railway strikes against private companies with government franchises. The principal issue is compensation, which in real terms has declined for most public-sector workers due to the combined effects of inflation and post-2008 government austerity. In response, the government has taken a hard-line stance, declaring that it cannot afford to meet workers’ demands, and that doing so will worsen inflation.

In a research brief published today, we suggest that the government’s hard-line stance is likely misguided and based on overly-simplistic economic reasoning. Because the labour market in Britain has become bifurcated, with public and private sectors operating largely separately, the government’s restrictive pay policy is unlikely to have much if any disinflationary impact on the labour market in general. In contrast, the declining quality of public services will have deadweight costs on the economy and further aggravate the slow growth of labour productivity. The resultant slow increase in tax revenues amid rising demands on the public sector could end up worsening the government’s long-term fiscal position; although the government is ideologically-committed to not raising taxes, it may have no choice but to do so in the medium term.

You can download the research brief here.