Chancellor Kwasi Kwarteng’s mini-budget has “broken a cardinal rule” of global economics that will make it “all but impossible” for departments to live within their existing spending plans and exacerbate unrest in relation to civil service pay levels, Nick Macpherson has warned.
Lord Macpherson, who was Treasury permanent secretary from 2008 to 2016, gave a stark reaction to ongoing market turmoil that resulted from Friday’s fiscal event, which has seen the value of the sterling slide in relation to the US dollar and the cost of government borrowing increase.
The crossbench peer said yesterday that current market pressures – created by the UK’s biggest round of tax cuts in 50 years and a lack of supporting detail on how they will be paid for – will “play themselves out over weeks and months”.
“It’s a long and repeated game,” Macpherson wrote on Twitter. “We have a floating currency which withstands day to day market pressures.
“At any point the ‘authorities’ can take countervailing action, though none of the options is good for growth.”
But Macpherson cautioned that the worst may yet be to come in terms of the global financial markets’ response, while the outlook for the UK public sector is particularly bleak.
“HMG has broken a cardinal rule: don’t look like an outlier relative to other G7 countries,” he said.
“The markets now have sterling and gilts in [their] sights. There will be rallies followed by brief substantive lurches downwards. We probably haven't seen the bottom.
“Meanwhile, the UK will pay a high risk premium for the increased debt it is selling, making it all but impossible to live within spending plans, even before inflation.
He added that the government is expecting public servants "to take bigger real wage cuts even than in 1931, which led to mutiny”.
Macpherson was referring to the government of the day’s decision to react to a depression-era run on sterling by imposing salary cuts for teachers, police officers and members of the Armed Forces.
Ten percent pay cuts across the board for public servants were translated to a 25% cut for some longer-serving – but lower-ranking – sailors, which led to industrial action known as the Invergordon Mutiny.
The mutiny caused a further run on the pound and led to the Bank of England abandoning the Gold Standard.
Civil service unions argue that pay freezes and sub-inflationary rises since 2010 equate to a real-terms pay cut in the region of 20% for officials.
Yesterday the civil service’s biggest union opened its strike ballot urging members to support industrial action in favour of a 10% pay demand – now broadly in line with annual consumer-price inflation.
The government’s current pay-remit guidance proposes average pay rises of between 2% and 3%. The offer was condemned as “not fit for purpose” by civil service leaders’ union the FDA and professionals’ union Prospect last month.
Both organisations called on the Cabinet Office to reopen negotiations over the guidance in the light of soaring inflation.
Reports over the weekend suggested that new prime minister Liz Truss has abandoned plans for a new spending review to take account of dramatic inflationary changes since 2021’s three-year settlement was announced.
Failing to allocate new money to departments will make it harder for leaders to afford pay rises in the 2%-3% range, let alone inflationary settlements.
Responding to the mini-budget, the Institute for Fiscal Studies said it was “almost inconceivable” that three-year spending plans based on inflation peaking at 3% would not need topping up, unless the government was willing to allow “a (further) deterioration in the range and quality of public services”.