The Bank of England would like to replace wage restraint for interest rate increases. This "policy" would inevitably fall hardest on public sector workers. Darling has already indicated his intention to push for below-inflation wage increases for public sector workers. Next year's wage negotiations could prove to be very contentious.
Yesterday, I had a quick look at public versus private average earnings. The data showed that between 2001-4, public sector wages grew faster than those in the private sector. More recently, the private sector had the edge. Perhaps, the key finding concerns recent real wage developments. Neither wage growth in either sector; private or public, have been able to keep up with inflation. Average real wages are declining across the economy.
Today, I looked at public sector employment. The public payroll peaked in 2005 at almost 5.5 million. Labour pushed through large increases in public employment, between 1998 and 2005, hiring an additional 670,000 workers.
More recently, the public employment numbers have fallen slightly. The government deficit has risen, pushing up public sector debt and threatening the government fiscal targets. It also means that the government now has little room to expand expenditure in an effort to boost growth and maintain aggregate demand.
Too much spending during the good years, and now there is little room to use fiscal policy as the bad years approach. Timing is everything.