The UK does not have a clear plan to fight inflation

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Growth in the UK is expected to be lower than its peers in the coming years and inflation is expected to be higher and more persistent. But I think it’s worth considering an underestimated risk: that a confused response from the government could accidentally set the already ruined British state ablaze because ministers lack a clear sense of macroeconomic structure.

Last month, Boris Johnson, still prime minister, told reporters that rail workers expected too much when they demanded a 7% wage increase, lower than the current inflation rate of 9.4%. “Too high demands on pay will make it incredibly difficult to put an end to the current challenges that families around the world face as the cost of living rises,” he said.

These sentiments have since been echoed by ministers and seem to be something they say in private as well. Andrew Bailey, the Governor of the Bank of England, has called for wage restrictions everywhere. But using public sector pay frameworks (which recommend how to set pay for civil servants) and public budgets (which allow these pay levels to be provided) as a tool to help guide the price level would be a huge change from the UK. political standards.

Britain uses monetary policy to target inflation; It has been decades since we adopted a so-called income policy to fight inflation. Indeed, pay review bodies, committees that advise ministers on public pay levels, are only asked to consider how best to manage services. For example, the teacher review committee has a mandate to “promote recruitment and retention within the limits of affordability throughout the school system as a whole.” You are not asked to think of other salaries.

It is not unreasonable to think that public sector wage agreements can be used as benchmarks for other employers. But if you try to use the single public sector compensation tool to aim for public sector loyalty Other inflation, you will end up losing at least one. And, right now, it will almost certainly be retention that is affected.

After 12 years of crushing, Britain simply has no room to use public sector budgets as anti-inflationary ballast. Take the NHS, where 6.6 million people in England are on the waiting list. This is well over 10 percent of the country. My colleague John Burn-Murdoch has already written that it is possible that NHS performance means that large numbers of people are struggling to return to work after the pandemic.

There is a crisis coming here. The kindest word I can think of to describe the government’s plans to attack the waiting list is “shaky”; parts of the hospital system have not yet recovered to even pre-pandemic performance levels, let alone a pace at which they can begin to burn the burden of backlog of care.

Elective admissions have yet to return to pre-pandemic levels

Things are likely to get worse and even become a political problem. Take this much-followed measure, once the NHS key performance goal, of how many patients are treated within four hours of arriving at the emergency room. Things are already sad and will get worse as the weather changes.

Percentage of patients treated within four hours in the emergency room

In addition to a short-term problem, there is a long-term one. The NHS pay (and the training pipeline) is already well outside what is needed to fill jobs: Nurses’ pay has fallen by about 10% over the past decade. The Nuffield Trust, a think tank, Reckons England is short of 12,000 hospital doctors and 50,000 nurses. A recent report by the parliamentary committee found that there are 200,000 vacancies in the health and social system.

Average wage for public sector workers as a percentage of the national average wage

It is difficult to see how the existing staff can cope with the ever-increasing demand for health care. Most of the low-impact efficiencies that can be extracted from the British NHS without upfront costs have been exploited. For example, according to the Health Foundation, the average time in hospital for hospitalized patients has decreased by 22 percent since 2010. But that’s it. There is no more play to give. From here on, budget compression will turn into poorer services.

A similar story can be told over much of the state. Teachers are also hard to find; I have spotted a local school near my home in South London that falls below the legal minimum of 190 opening days per year. The local government, which offers services from garbage cans to social assistance, is paralyzed. There are parts of the state that are now collapsing and that cannot absorb new cuts in real terms.

So what do you do, faced with this, if you are worried about inflation and growth? Well, let’s go back to the first principles:

  • Set the pay to fill jobs

  • Set service budgets to purchase what you need within your tax rules

  • Fix taxes to get the fiscal position more or less in equilibrium in the medium term

  • Set subsidy rates to protect low-income families from horrific price increases

  • Set the monetary policy shift in gear to control inflation

This is a classic macroeconomic picture, the kind of thing that could have been proposed by Jan Tinbergen, the late great Dutch economist. Determine what your goals are and then make sure you have at least one tool aimed at each of them.

These tools are opposed to each other: I am outlining a proposal to borrow a slice of the money, spend it, raise wages and then let the Bank of England lean more on demand with tighter monetary policy. This could lead to a longer period of more than comfortable inflation. But this is active ordered macroeconomic structure: a structure that will hold up together. You know how the parts will mix and move as the facts change.

Conversely, trying to take a hard line on inflation by using public services as a weapon against inflation runs the risk that ministers will end up losing control anyway, and then bend in an expensive way to save public services and households. prey to energy shock in a few months then. Indeed, a “stable” framework is one that will struggle Moreover if inflation surprises on the upside. It is likely to disintegrate under political pressure as real family incomes, hospital benefits and school hours decline.

The change in terms of trade since the start of the war in Ukraine has made the UK poorer and Britain needs to allocate losses. But tightening public budgets means asking the same public workers who have suffered the blow since 2010 to take it back. And, given the lack of flexibility in the state and the goodwill of that staff, that definitely also means cutting services. At its core, this is indeed one of the strangest macroeconomic ideas: using hospital admissions and the length of the school day as a tool to target the inflation rate.

Martin Sandbu is absent. Claire Jones will be back next week.

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