Wednesday, 21 March 2012

Unpicking the Glue

There has been much talk over the past few days of the current Conservative/Lib-Dem Westminster coalition introducing regional pay for civil servants and other Government employees. While such a scheme might well save a few bob here and there, it will also constitute a further attack on one of the most fundamental pillars of any successful nation state — solidarity.

The rationale for regional pay is the somewhat shaky one that private-sector employers cannot "compete" with the public sector for the brightest and best individuals. But what about all those talented people on northern dole queues? And do northerners living elsewhere really move there in order to earn more, or simply to earn at all? What's undisputed is that the bulk of the British private sector today is in fact the service sector, and, through the local deflationary impact, that will probably suffer considerably more than it gains.

Along with national rates for social security benefits, national pay rates for public-sector workers are a key tool to transfer money from richer to poorer areas — according to economists part of what makes a common currency possible. Yet the Conservatives, the very people who correctly predicted the Eurozone's difficulties in the absence of fiscal union, seem to be planning to replicate just that unsustainable situation in England.

Even if regional pay rates are justified on the level of an individual's purchasing power, the question will remain of how best to even out disparities in wealth between the English regions, then. And it is not merely an economic issue. Given that Scotland and Northern Ireland may soon be granted the power to vary corporation tax, one need hardly own a crystal ball to predict increasing demands from people in the north of England, and the north-east in particular, that money saved through the introduction of regional pay be put towards lowering it in their area. After all, they will be among the biggest losers if businesses decide to relocate to Scotland (Newcastle is closer to Edinburgh than it is to Sheffield, never mind London). And the smaller private sector means that any monetary savings can go further on that front too.

Brian Ashcroft has said: "An alternative view that chimes better with the ethos of regional variation and the rejection of national pay is that it should be the people in the North East themselves, who should decide. But to do that they would require a government that raises and spends taxes in the region according to regional preferences. In other words, it seems to me that the logic of regional variations in public sector pay is fiscal federalism with regional governments having responsibility for a range of taxes and the provision of public services including setting the pay rates of public workers."

Scotland, which is more or less in the middle when it comes to GDP, will presumably also be more or less in the middle when it comes to the allowance made for public-sector wages in the block grant (equivalent to the average English rate as delivered via the Barnett formula). But if George Osborne thinks that those troublesome Picts will be happy with that, he clearly doesn't know Scottish Nationalists. In the absence of complete fiscal autonomy, and particularly if there is any sort of notional Scottish budget surplus based on oil revenues not under Scottish control, people in Scotland will, quite rightly, demand to be paid at the highest effective English rate — and will vote SNP, and perhaps for independence, if they don't get it. Remember that regional pay is being introduced now in the absence of full-blown fiscal autonomy, whereas the vote on independence will not be until the autumn of 2014.

It gets even worse for Britain if the concept of regional pay scales is extended to benefits, one of the last remaining mechanisms for fiscal transfer. Of course, since 1979 benefits in Britain have largely been pegged to inflation rather than average earnings, and they are now well on their way to becoming, as Michael Portillo once candidly predicted in the case of the basic state pension, of "nugatory" value. In economic terms, reducing social security rates in the north would be a double whammy. It would also be damaging socially. Imagine the middle-brow southern English media complaining of benefit tourism on the part of unemployed northern jobseekers living in their area, while on the street people use that most disgusting of expressions, "northern monkeys".

Small wonder that the Herald has predicted: "Once George Osborne is done cutting public sector pay in the English north, "England" could become a fragile concept."

Like Margaret Thatcher's attacks on solidarity in the 1980s, regional pay may increase the centrifugal tendencies at play on the British state. For the first time, they may also be extended to England itself.

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