Philip Hammond’s re-emergence as a power in the cabinet can be seen clearly as the battle rages inside government over the thorny question of public sector pay.
There may have been a green light from No 10 to rip up the current public sector pay cap and give the police and prison officers a 1% rise plus a 1% bonus for 2017-18, but the Treasury has made sure the bonus is not part of workers’ consolidated, pensionable pay and is funded from within existing budgets.
And the police and prison officers, as a group, amount to only one in 20 public sector workers. So headlines implying that the 1% cap is in jeopardy across the board, are as yet, premature.
Hammond is so far refusing to be blown off course to save the government abandoning its third attempt to balance the books by a much-publicised future date. After George Osborne scrapped 2015 and then 2020 as the moment the exchequer achieves a budget surplus, he is determined to stick to the 2025 outlined in the manifesto.
Britain has suffered from the longest period of earnings stagnation for 150 years, according to last week’s IPPR economic justice commission report, and since 2011 public sector employees have taken a much bigger hit to their salaries than the average worker in the private sector.
It not clear Hammond can hold the line and at the same time implement his own pet projects. The most recent pay figures for June show that private sector pay grew by 2.3% on average over the previous year compared with just 1.4% in the public sector. The gap is expected to continue for the rest of the parliament, leaving public sector workers suffering the longest squeeze relative to the private sector in a generation.
Inflation figures for August made the situation worse after they showed that the Brexit-induced fall in the pound is continuing to push up the price of imports. The consumer prices index has hit 2.9% and according to most forecasters is likely to go higher as the year draws to a close.
Paul Johnson, the head of the tax and spending thinktank, the Institute for Fiscal Studies, said it would be impossible to prevent a decline in standards across the public sector if the 1% cap were to remain in place, or if it was lifted and funded from within existing budgets.
He reckons the public sector would find it impossible to recruit the staff it needed with the cap in place. Cuts to services to fund a pay rise would hardly qualify as a political solution, he said, earning neither the applause of workers nor the public.
But to match the forecast for pay rises in the private sector, the Resolution Foundation says the government will need to spend about £10bn extra on public sector wages by 2020.
The thinktank said abandoning the current policy of job cuts, as Labour proposes, and allowing the public sector workforce to grow in line with GDP would cost a further £12bn.
Looking slightly further ahead, the IFS says that by 2021–22 a Labour government would need to provide departments and local government with an additional £9.2bn a year to pay for the higher costs of employing more public sector workers on higher rates of pay.
These are chunky figures and would throw a spanner in the works of Hammond’s preparations for his first major budget on 22 November, which according to those close to the chancellor, is focused almost entirely on his plans for skills training, overhauling university fees, infrastructure spending and public investment more generally.
If Osborne was the ultimate tactician, whose budgets were designed to weather a week’s worth of headlines and analysis, and not always successfully, Hammond sees himself as a strategist, who must not only help the economy bridge the Brexit gap, but also spend carefully on projects that will come to fruition long after he is retired.
That means resisting calls to relax the welfare cap as much as it does planned austerity across Whitehall, local government, the health service and schools. Few outside the Treasury believe it is a tenable position.