by John Knox

One of the great battles of the winter will be the fight between higher pay and jobs. It will begin with the trade union rallies in London and Glasgow on 20th of October and be fought out in councils across the UK as the government’s pay freeze – north and south of the border – comes to an end. The new target will be a one per cent rise. This is ambitiously above the predicted growth rate of the economy and presumably will result in a mild doze of inflation. Fair enough, we can’t expect a pay freeze to last for ever.

The problem is that the unions do not accept the need for a pay freeze or a one per cent pay limit, or indeed the whole austerity programme. And, in a way, I can see their point of view. It wasn’t the workers who caused the recession, so why should they be the ones to pay the price of what will amount to a 10 per cent drop in the nation’s income. They say it should be the bankers and the rich, who benefited from the pre-crash boom, to dig us out of the hole.

They point accusingly at the government’s cut to the top rate of income tax, from 50 per cent to just 45 per cent. In Socialist France it’s going up to 75 per cent. They point to the tax loopholes exploited by large companies, and the rich, which are losing the Treasury between £25b and £40b a year. They suggest a tax on financial transactions which could bring in another £20b a year.

They also argue that Britain’s national debt is not so large as to require an age of austerity. At around 80 per cent of GDP, it is in line with other countries such as France and the USA and well below the danger levels of Ireland, Italy and Portugal (at 100 per cent) or Greece and Japan (at 120 per cent). The interest payments are just 6 per cent of our GDP, only 2 per cent more than before the recession.

Yes, the unions say, the government’s deficit is too high at 6 per cent but that is because we are in the midst of a recession when tax receipts are low and welfare benefits are high. Good Keynesian theory suggests that government’s should spend more during recessions and rake the money back in when the economy recovers.

Now, all of this is good stuff but to go on to argue that workers should be paid more than a one per cent rise next year is wilfully unrealistic. At best, the extra money raised from the rich, would only close the deficit of £90b, not pay off our debt. It would still leave us bumping our heads against the 80 per cent normal ceiling for national debt. The inconvenient truth is that Britain lost 10 per cent of its real national income in the banker’s crash and only a cut in living standards for the masses will be large enough to match that fall.

There is also the small matter of jobs. If councils and government departments are being forced to take their share of that 10 per cent fall in national income, it must mean reducing their wage bill, either by holding real wages down or cutting jobs. Already we have seen 36,000 public sector jobs go in Scotland in the last 18 months. The unions themselves are predicting that another 70,000 will go in the next five years.

These figures are shocking. Unemployment is already at 8 per cent and nearly a million of those who are employed are being forced to take only part-time work. Youth unemployment is at an even more shocking 20 per cent.

The unions, of course, only represent those in work. Calling for higher pay for those lucky enough to have jobs will not do any favours for the unemployed. They will be left to drop down into the underclass, living on welfare, in poverty and neglected.

I’m sure this is not what those on the 20th October demonstration want – and indeed they will point out that the best way of improving the lot of the poor and increasing employment is to stimulate the economy…with pay increases, especially for the lower paid. They have a point when it comes to those on less £21,000 a year and no one is arguing against a larger than one per cent rise for those workers. But this would have to be paid for by increases of less than one per cent for the rest.

Pay rises, of course, are not the only way of increasing demand in the economy. If you get more people into employment – or prevent the cuts – you will not only increase demand as those people spend their new wages, you will also rake in taxes which in turn can be used to stimulate further demand. The unions themselves have worked out that the low growth is costing the Treasury £51b a year in lost income tax and another £34b in welfare.

I know that incomes policies have been tried and have failed in the past – notably by Ted Heath, Richard Nixon and Jim Callaghan but they were implemented in order to fight inflation. This time, we are fighting unemployment. In Germany in 2003, Gerhard Schroeder introduced his “Agenda 2010” reforms which kept wages under control, cut income tax for the low paid, introduced a welfare-to-work programme and compulsory private pension schemes. The result was a disaster for him and his SDP party but a triumph for the German economy. It has gone on to be the strongest in Europe – youth unemployment is down to 8 per cent.

Given that Plan A in Britain isn’t working – the private sector is just not able to respond to the Chancellor’s cuts treatment – there seems little point in persisting with it into a winter of discontent. Instead, if the Conservatives and the Liberal Democrats want to use their suicidal tendencies positively, they could suggest to the unions on 20th October that they sit down to beer and sandwiches in Downing Street and work out a Plan B Plus for the British economy. And it should include a deal on wage restraint in return for a halt to the cuts in public sector employment. Then we might actually see a return to growth and a more moderate prosperity for all.