It was political jujitsu. The coalition turned the public sector unions’ strike back against them. When the unions first decided to stage a walk-out the day after the government’s Autumn Statement, they wanted to show that reforms wouldn’t go through without a fight. But the coalition has chosen to embrace this conflict. Senior Cabinet ministers have taken to saying, ‘You can’t understand Tuesday [the Autumn Statement] without Wednesday [the strike].’
The government wants to be seen as on the side of necessary but fair reform; facing down opponents who believe in ‘something for nothing economics’. Public sector unions, with their desire to protect pensions that are far more generous than those on offer in the private sector, are ideal opponents in the eyes of coalition strategists.
On Tuesday, George Osborne chose to raise the stakes in this battle. He announced that he was asking ‘the independent pay review bodies to consider how public sector pay can be made more responsive to local labour markets’. This dull-sounding proposal is hugely significant. The abolition of national pay rates would mean the end of national pay bargaining and destroy the main purpose of national trade unions. Like all of Osborne’s policy decisions, this move has to be seen as part of his plan to create a new Conservative majority. The Chancellor is determined to use structural reforms to tilt the political and economic balance of the country to the right.
At the moment, the fact that public sector workers in Cleethorpes are paid the same as those in Cheltenham means that in large swaths of the country the best-paid jobs are in the public sector. This has created what the Local Government Secretary, Eric Pickles, calls ‘the new establishment’: people who are among the wealthiest in their community but have an interest in an ever-growing state. They are unlikely to be receptive to the messages of the small state party.
Another benefit of this move is that it should encourage more people into the private sector in parts of the country where up to now the state has provided the most lucrative and secure employment. As one senior Tory says, ‘You create a bigger private sector, you create more Tories.’ Indeed, it is worth remembering that the overall Osborne plan is meant to lead to 1.7 million more private sector jobs and 710,000 fewer public sector ones. And more is being done to make the public sector less attractive compared to the private sector. Osborne also announced that the public sector pay freeze will be followed by two years where pay will only rise by 1 per cent.
The Chancellor’s other big attempt to tilt the political playing field was his announcement that there would be 0.9 per cent cuts in public spending in both 2015-16 and 2016-17. These reductions are needed because he is no longer on course to eliminate the structural deficit by the end of this parliament. But they also push public spending as a percentage of GDP back below 40 per cent.
Treasury sources are adamant that where these cuts will fall will be spelled out by the coalition ahead of the next election. This means that the Conservatives and the Liberal Democrats will go into that campaign yoked to the same set of fiscal plans for the first two years of the parliament. This, in the words of one friend of the Chancellor, prepares the way for ‘a traditional Tory play. You outline tough spending numbers before an election. If Labour won’t match them, it sets up a tax bombshell campaign.’ And this time it will be two parties attacking Labour, not one.
This dynamic makes a Lib Lab coalition even less likely than before. As one Lib Dem minister drolly observes, ‘It is hard to imagine how the leap to euphoric support for the emergency Ed Balls 2015 budget would quite work in practice.’
But it would be wrong to think that this Autumn Statement was pure Osborne. There were two very visible signs of the constraints of coalition. First, there was the absence of any real supply-side agenda. The Lib Dem pushback against the Beecroft report, which recommended that unfair dismissal should be replaced by severance pay based on length of service, have neutered the proposals almost entirely. There will now merely be a consultation on whether this rule should apply to businesses that employ less than ten people.
The Lib Dem victory over the man they call ‘bonkers Beecroft’ is a reminder of how strongly they believe that deregulation is simply a Tory ideological obsession. Osborne’s warning that it is no longer good enough being the best in Europe on these things because ‘the entire continent is pricing itself out of the world economy’ was aimed squarely at his coalition partners, who love to hide behind this defence. One senior figure in Downing Street remarks that ‘having the most flexible labour market in Europe is like saying we’re better than the Italians at cricket’.
The biggest concession of all was the decision to increase all benefits in line with inflation. Osborne was strongly opposed. He wanted to raise out-of-work benefits in line with earnings, the principle being that those on the dole shouldn’t get bigger increases to their income than those in work. But Osborne was defeated by an alliance of the Nick Clegg and Iain Duncan Smith.
This creates a major political problem for the Tories. Osborne says that he wants ‘to support the person who leaves their house at 6am or 7am, goes out and does perhaps a low-paid job in order to provide for their family, and is incredibly frustrated when they see on the other side of the street the blinds pulled down and someone sitting there on a life of out-of-work benefits’. But that hard-worker will now know that those who live behind closed curtains have just received, thanks to the government, a much bigger rise than they have.
There were, though, victories for the right in the Autumn Statement. Osborne threw his weight behind selective mathematics schools, a big Cameroon olive branch to the pro-grammar-schools crowd.
But everything that Osborne announced in his statement, and all this general election planning, could well turn out to be irrelevant. If the eurozone does collapse, an outcome that appears more probable by the day, then the economic challenges facing the country and the political ones facing the coalition will suddenly be very different. How Osborne handles this possibility is the biggest test yet of his skills as a strategist.
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