As the Chancellor of the Exchequer Rishi Sunak prepares to deliver his spending review on Wednesday, already there is a looming fight over public sector pay that could dominate the politics of the post-pandemic landscape.
Before addressing that issue, let’s look at some of the big picture issues that condition what the Chancellor can and cannot do.
When he presented his pre-lockdown budget in March, he told MPs that government borrowing this year would be £55bn. In fact, it is on course to be over £350 billion, an eye watering 17% of GDP. And that’s before we get to the issue of public sector net debt which will top two trillion pounds.
Look out this week for the update from the Office for Budget Responsibility (OBR) who are likely to conclude that the UK economy is likely to shrink by more than 10% this year.
The statement will cover spending in the next financial year and will not detail plans for a three or four-year cycle as is normally the case. That’s probably wise.
The final bills associated with Covid are not yet known and he does not want to commit to future spending which may have to be reviewed depending on how the pandemic ends and the new normal settles.
We know defence spending will rise and in all likelihood there will be a squeeze on the overseas aid budget. More details will be given on infrastructure spending and there will be more money for the NHS and education in England which will trigger more resources for Scotland through the Barnett Formula.
What is less clear is what will happen to spending outwith NHS money. In the decade to 2019/20, that was cut in real terms by 20% as austerity became the policy choice to deal with the 2008 post-crash structural deficit.
Some services were cut to the bone long ago, so the scope for further cuts must be limited almost certainly pointing to a longer term policy of tax rises.
Those are for another day and another tax year or two. Taking money out of the economy now would be self-defeating. The only issues over tax increases centre on timing and which taxes he decides to put up.
The big strategic question for this week is what the measures taken together tell us about the direction of travel of the Chancellor.
Sunak looks like he is speaking in forked tongue. This will not be austerity, he declared yesterday as he toured the TV studios and yet he has been clear there will be a need for restraint.
His Sunday interviews were an exercise in saying little, with onlookers being left to decode on the basis of what was left unsaid or by how quickly he deflected an issue by answering a question he wasn’t asked.
The elephant in the room is public sector pay. In 2019/20, the UK Government spent £204bn on the salaries of 5.4 million public servants. Those same people saw a real-terms decrease in their spending power as over the previous decade they were made to pay for the failings of the banks.
Little wonder that the Institute for Fiscal Studies has concluded: “Relative to pay in the private sector, public sector pay has fallen to its lowest levels in decades likely exacerbating difficulties with recruitment and retention.”
Now, public sector pay in Scotland is largely a matter for the Holyrood administration, but what happens in England is important since it affects the ability of minsters here to fund more generous pay settlements.
If spending on NHS workers and teachers in England rises, so too does the budget for those services, which in turn triggers more money for ministers here to follow suit.
Conversely, pay restraint in England limits the growth of money that could come here and by default means the Scottish finance secretary would have to raid budgets to fund higher wage demands.
The Chancellor cannot have it both ways. He can’t argue that austerity is dead and at the same time cut in real terms the wages of workers who have already seen living standards squeezed.
If NHS staff in England are exempted from either a pay freeze or a below inflation cap as rumoured, then he will create a hierarchy of entitlement something that the trade unions can never accept since it views some workers as more deserving than others.
The consequence of further restraint will be strike ballots fuelled by a burning sense of injustice that having paid for the folly of the banks workers are now being asked to pay for a pandemic.
If the Scottish Government follow suit then they will have to explain their position during the Holyrood election campaign next April.
Unions are circling and they are angry. 2021 could well see a summer of discontent.