It might not be popular, but Brexit has made the public sector pay cap necessary

As ever, economics doesn’t get much of a look-in in the current debate about public sector pay. For a start there’s an excess of emotionalism about brave public servants such as those in the NHS, the police and fire service who have had to deal with the aftermath of terrorist murder and the Grenfell Tower disaster.

Well, they are brave, astonishingly so. I admire them as much as anyone. Indeed I know that I could never do their jobs, nor the sort of routine hard work that care workers, teachers, PCSOs, social workers, the armed forces and so many others undertake day in day out. Of course they all “deserve” a pay rise. But if we are not careful we will end up effectively indexing public sector pay angst the incidence of terror attacks or man-made and natural disasters.

By all means we should give something more tangible than medals to those directly caught up in these traumas – significant cash bonuses as a recognition of society’s debt to them. Yet the dedication to duty of the staff at, say, St Mary’s hospital in Paddington after the Westminster Bridge attack, or the British Transport Police who took on three terrorists at Borough Market cannot be used as a justification for giving, for random examples, a lecturer at the University of Aberdeen or a prison officer in Wakefield an equal increase.

Second, there is the argument about the gap, real or imagined, between public and private sector pay. This is bandied around as if some rule of nature decreed that there should be no such difference. This is nonsense anyway, if you stop for a second to consider that the jobs across and within each sector are so different. No-one in the public sector, for example, makes cars or is a taxi driver – these jobs are confined to the private sector. Similarly there no private sector librarians or probation officers. So why should their pay should be linked to each other? Where there are jobs that exist across the two – HR professionals, architects or cleaners for example – there is a labour mallet operating that can indicate appropriate levels of pay, locally or nationally.

Remember, too, that public sector jobs are generally more secure, and that public sector pensions, linked to final salary, are more reliable and generous than many private sector ones. So pay isn’t the only factor even if you accept the theology of parity between those who happen to work for the taxpayer and others who work for shareholders.

Intelligent people such as Oliver Letwin, apparently the Tories’ godfather of austerity, argue that public sector pay is falling a bit behind the private sector now, and needs to be “corrected” after years of pay rises capped at 1 per cent. And yet of course that was merely to try and get the public finances under control – we spend about £180bn a year on public sector wages – and to correct for the fall back in private sector pay that had opened up in the New Labour years. It was not some act of vindictiveness. We endured austerity for a reason, and the coming of Brexit makes an even more powerful and unavoidable one for continuing austerity. Tired of austerity? Tough.

My point here is that the cap itself, and removing it for that matter, are not “policies” that make much sense. The rational thing to do across the vast array of different public sector roles is to balance supply and demand. If we are short of nurses – and we may well be short of even more once Brexit stops immigration – and the country decides it wants a responsive NHS and is prepared to pay for it via taxation, then we should raise the various levels of pay for the various disciplines by an appropriate amount. We could also alter wages regionally, reflecting circumstances in different parts of the country. Midwives in South Wales may be in relatively ample supply compared to geriatric specialists needed on the south coast of England. National public sector awards across the board are an outdated and clumsy way of managing the labour market.

The fundamental point, though, is that you cannot say that nurses and teachers and soldiers deserve a pay rise unless you’re prepared to admit that that means that you deserve a tax rise, and a smaller pay packet at the end of each month. Of course we could just borrow the money, but borrowing to spend, rather than invest in infrastructure, is unlikely to deliver the rewards over the years that would allow us to pay off that debt smoothly. Somewhere along the line Britain has sort of un-learned all the hard-won lessons of Thatcherism, about not being able to pay ourselves more than we earn as a nation, about there being very real limits to what governments can borrow, about not being able to “have it all” and about being unable to escape the realties (and benefits) of globalisation. Jeremy Corbyn is telling us that we can have everything and that “the rich” will pay for the lot and the lot is virtually unlimited, because the ills of society are virtually unlimited.

What may the next few years bring, if we fail to exert some economic discipline? Inflation and unemployment in an increasingly uncompetitive economy that tries to pay itself more than it produces, quite simply. A combination of public sector pay hikes, an ever higher “living wage”, which will spur others to restore their pay differentials, Brexit (through a drastic reduction in the supply of labour) and increased trade union power or workers’ rights (promised by both main parties to varying degrees) will gift Britain with the kind of wage-price spiral that inflated the currency and shredded savings and economic confidence in the 1960s and 1970s. It was a time of enforced austerity. A time, some of us recall well, when a 25 per cent pay rise in the private or public sector might have been “deserved”, but wouldn’t actually buy you any more because prices were jumping at the same rate. It was called “confetti money” at the time. For all the disdain and ridicule the “magic money tree” has attracted, it doesn’t actually exist, you know. Not even for nurses.