Inflation and wage pressures will weigh on strained public services

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Hello. Inflation in the UK has reached 9%, the highest level in more than 40 years and almost double the rate forecast by the Bank of England six months ago. Today, we are analyzing the challenges this poses for ministers and wondering if the Conservatives could come up with an exceptional tax. Contact us at the email address below.


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The history of wages is also a history of public services

Good news! Unemployment in the UK has fallen to its lowest level since 1974. Bad news! What did we have in 1974? The answer: runaway inflation, stagnant growth and a mediocre Labor Party winning the general election by default.

This historical fact is what frightens Tory MPs and encourages Labor MPs. Household pressure is one of the reasons Sir Keir Starmer enjoys a reliable lead in the opinion polls over Boris Johnson. More importantly, it has painful and lasting consequences for households today. As my colleagues Delphine Strauss and Chris Giles point out, Britain faces the same energy price shock as other European countries, but it also has a labor market closer to that of the United States, with widespread labor shortages fueling wage pressures.

The problem this creates for the Conservative Party is this: if prices go up but wages don’t, then all voters will be miserable and that’s bad for the government. But if the prices and wages rise, this creates specific pressures on the public sector, which will have difficulty in filling vacancies.

If you factor in bonuses, total wages still outpace inflation, according to Office for National Statistics figures for the three months to March. But compared to the private sector, public sector wages lag behind. Nominal total wages rose 10.7% year-on-year in finance and business services, but only 1.4% – the equivalent of a sharp drop in real terms – in the public sector.

Line chart of annual change in CPI (%) showing UK consumer price inflation hitting 40-year high

Inflation is obviously a direct political problem for the government. But it is also a indirect first, because of the pressures it creates on public services. Public sector employees will move elsewhere, further adding to the pressures already faced by schools and hospitals.

Like Laura McInerney, former editor of SchoolsWeek, explain here, the UK is already facing a shortage of teachers for many different reasons. Add to that rising private sector wages and you have real problems.

Starmer’s party has a number of shortcomings, but I think the most likely scenario after the next election is Labor in power. It is hard to see how the Conservatives can avoid conducting the next legislative elections against a backdrop of generalized inflation (which is bad for a government in place, whatever its hue), or a strain on public services ( which favors the Labor Party whether in opposition or in government).

Labour’s big break

Chancellor Rishi Sunak has so far resisted Labor calls for a windfall tax on energy companies, arguing it could hamper investment in the North Sea at a time when the government wants to improve energy security in the North. UK. How long can he keep it?

There are good reasons to resist windfall taxes, but, as Chris Giles explains further here, it may be a rare time when a windfall tax is a good idea. Equally important from a government perspective, Shadow Chancellor Rachel Reeves and her colleagues have been running a lot to demand a windfall tax, so implementing one yourself robs the opposition of a useful talking point. .

On top of all that, the government may well want to get out of the energy price cap. Tory ministers and MPs are prone to liken the cap to the exchange rate mechanism, the ill-fated attempt to peg the pound sterling to the deutsche mark, from which the UK was ultimately painfully forced to part ways.

You see how the government could abandon the cap and use it as a pretext to introduce a windfall tax on energy companies, which would allow the Conservatives to fund a range of measures to lessen the pain of rising inflation. But whether the government ends up abandoning the price cap or not, it’s highly likely that the Conservatives will eventually pass some sort of windfall tax. Let us know what you think by voting in our poll.

Poll asking if the government should impose a windfall tax on energy giants.

Now try this

This Vanity Fair article about the future of star wars is fascinating: not so much for the tidbits about upcoming movies and TV shows, but for Lucasfilm President Kathleen Kennedy’s thoughts on what worked and what didn’t since capturing $4.1 billion by Disney from George Lucas’ hit franchise.

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