Rishi Sunak says public sector pay rises will fuel inflation. Economists say they won’t
Rishi Sunak has said he cannot raise public sector wages because doing so will fuel inflation.
The government has warned of a “wage-price spiral”, also known as wage-push inflation, in which prices rise (inflation) due to higher wages which, in turn, increase prices in a perpetual loop.
As more workers go on strike this month demanding their pay matches or beats inflation – which stands at 10.7% – two economics experts have told Sky News the government is not correct in its assessment.
They agreed increasing public sector wages would not push up inflation.
Dr Ethan Ilzetzki
Associate professor of economics, London School of Economics
“It’s very wrong-minded of the government to approach it in this way,” Dr Ilzetzki said.
“Private sector wages do feed into inflation – wages increase, costs increase and they want to pass that on to the consumer.
“So private sector wages are more likely to lead to inflation or a wage-price spiral but there’s no similar way that the public sector could cause inflation.
“The caveat is, of course, an increase in public expenditure could lead to inflation and public wages are one way public expenditure is increased, but the government could increase wages and cut other parts of the budget.”
He said the conflict between the government and public sector workers is essentially political and about “who burdens the cost”.
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The Bank of England’s job is to keep inflation close to 2%, he added, so “the first order of business is to bring inflation down” to that figure.
“The Bank of England always has the ability to bring inflation down, even if its caused by global energy prices or geopolitical conflict,” Dr Ilzetzki said.
“That does have a cost: the further slowing down of the economy which has already plummeted, so the Bank of England does have an unenviable task but it has a very clear mandate to keep prices at a constant level.”
He added that the friction between the unions and the government is “about taking responsibility for economic problems” that politicians “need to address”.
Professor Alex Bryson
Professor of quantitative social science, University College London
“The government’s concern with wage-push inflation is misconceived as they’re missing much of the bigger picture: unemployment and shrinking of the size of the economy,” Prof Bryson said.
“Past periods of recession inflation were often followed by deflation – this happened in 2008.
“But this episode is different, the chief reason [for inflation rising] was not wage-push but COVID-induced restraints, which hike prices but will die back over time, as well as energy prices and ongoing uncertainty over Ukraine.”
Professor Alex Bryson said the government is missing the bigger picture
He said unemployment rates have been low for a long time and wages have been relatively stagnant, which has meant workers’ arguing power is “not so great”.
“There are more benefits for the government paying public sector workers more than not, it’s conceivable they could benefit from an increased low turnover, which would cost the public less than it does now,” he said.
“Even a substantial pay rise will not see public sector workers catching up on the pay gap with the private sector that has been widening since 2010.”
Prof Bryson said he thinks the UK is already in recession and it will be “long and deep”.
“We’re seeing a deeper recession than is currently identified, we saw that before with the great recession of 2008 so you would expect that would normally mean a spike in unemployment,” he said.
“Surveys in recent months show an increased proportion of indexes in the labour market saying unemployment will rise in the next 12 months.
“That will mean GDP is lower than it currently is which will mean inflation will start to fall.”
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He added that at the moment, the government should be more worried about high non-employment – those not in work and not seeking work – and underemployment – those who want to work more hours but do not have the opportunity to.
“Their focus should be on reducing the rate at which real wages are falling,” Prof Bryson said.
“It’s not clear to me whether the government will be able to hold their line on wage-push inflation, especially if the unions are holding out as they seem to be.”
The COP29 climate talks have reached a last ditch deal on cash for developing countries, pulling the summit back from the brink of collapse after a group of countries stormed out of a negotiating room earlier.
The slew of deals finally signed off in the small hours of Sunday morning in Azerbaijan includes one that proved hardest of all – one about money.
Eventually the more than 190 countries in Baku agreed a target for richer polluting countries such as the UK, EU and Japan to drum up $300bn a year by 2035 to help poorer nations both curb and adapt to climate change.
It is a far cry from the $1.3trn experts say is needed, and from the $500bn that vulnerable countries like Uganda had said they would be willing to accept.
But in the end they were forced to, knowing they could not afford to live without it, nor wait until next year to try again, when a Donald Trump presidency would make things even harder.
Bolivia’s lead negotiator Diego Pacheco called it an “insult”, while the Marshall Islands’ Tina Stege said it was “not nearly enough, but it’s a start”.
UN climate chief Simon Stiell said: “This new finance goal is an insurance policy for humanity, amid worsening climate impacts hitting every country.
“No country got everything they wanted, and we leave Baku with a mountain of work still to do. So this is no time for victory laps.”
The funding deal was clinched more than 24 hours into overtime, and against what felt like all the odds.
The talks were rocked from the start by the incoming presidency of climate denier Mr Trump, the moment Argentina’s team were recalled back to Buenos Aires by their right-wing president and a controversial letter that sent shockwaves through the United Nations.
Pic: AP
The fraught two weeks of negotiations pitted the anger of developing countries who are footing the bill for more dangerous weather that they did little to cause, against the tight public finances of rich countries.
A relieved Juan Carlos Monterrey Gomez, climate envoy for Panama, said there is “light at the end of the tunnel”.
Just hours ago, the talks almost fell apart as furious vulnerable nations stormed out of negotiations in frustration over that elusive funding goal.
They were also angry with oil and gas producing countries, who stood accused of trying to dilute aspects of the deal on cutting fossil fuels.
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Climate-vulnerable nations storm out of talks
The UN talks work on consensus, meaning everyone has to agree for a deal to fly.
A row over how to follow up on last year’s pledge to “transition away from fossil fuels” was left unresolved and punted into next year, following objections from Chile and Switzerland for being too weak.
A draft deal simply “reaffirmed” the commitment but did not dial up the pressure in the way the UK, EU, island states and many others here wanted.
Saudi Arabia fought the hardest against any step forward on cutting fossil fuels, the primary cause of climate change that is intensifying floods, drought and fires around the world.
Governments did manage to strike a deal on carbon markets at COP29, which has been 10 years in the making and will allow countries to trade emissions cuts.
‘Not everything we wanted’
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The UK’s energy secretary, Ed Miliband, said the deal is “not everything we or others wanted”, but described it as a “step forward”.
“It’s a deal that will drive forward the clean energy transition, which is essential for jobs and growth in Britain and for protecting us all against the worsening climate crisis,” he added.
“Today’s agreement sends the signal that the clean energy transition is unstoppable.
“It is the biggest economic opportunity of the 21st century and through our championing of it we can help crowd in private investment.”
Protesters at the summit in Baku. Pic: AP
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The Azerbaijan team leading COP29 said: “Every hour of the day, we have pulled people together. Every inch of the way, we have pushed for the highest common denominator.
“We have faced geopolitical headwinds and made every effort to be an honest broker for all sides.”
At least 20 people have been killed and 66 injured in Israeli strikes on central Beirut, Lebanese authorities have said.
Lebanon‘s health ministry said the death toll could rise as emergency workers dig through the rubble looking for survivors. DNA tests are being used to identify the victims, the ministry added.
The attack destroyed an eight-storey residential building and badly damaged several others around it in the Basta neighbourhood at 4am (2am UK time) on Saturday.
The central Basta neighbourhood in Beirut
The Israeli military did not warn residents to evacuate before the attack and has not commented on the casualties.
At least four bombs were dropped in the attack – the fourth targeting the city centre this week.
A separate drone strike in the southern port city of Tyre this morning killed two people and injured three, according to the state-run National News Agency.
The victims were Palestinian refugees from the nearby al Rashidieh camp who were out fishing, according to Mohammed Bikai, spokesperson for the Fatah Palestinian faction in the Tyre area.
Israel’s military warned residents today in parts of Beirut’s southern suburbs that they were near Hezbollah facilities, which the army would target in the near future. The warning, posted on X, told people to evacuate at least 500 metres away.
The army said that over the past day it had conducted intelligence-based strikes on Hezbollah targets in Dahiyeh, in Beirut’s southern suburbs, where Hezbollah has a strong presence. It said it hit several command centres and weapons storage facilities.
Pic: AP
Israel has killed several Hezbollah leaders in air strikes on the capital’s southern suburbs.
Heavy fighting between Israel and Hezbollah is ongoing in southern Lebanon, as Israeli forces push deeper into the country since launching a major offensive in September.
According to the Lebanese health ministry, at least 3,670 people have been killed in Israeli attacks there, with more than 15,400 wounded.
It has displaced about 1.2 million people – a quarter of Lebanon’s population – while Israel says about 90 soldiers and nearly 50 civilians have been killed in northern Israel.
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‘Dozens’ of Palestinians killed in Israeli airstrike
Meanwhile, six people, including three children and two women, were killed in the southern Gazan city of Khan Younis.
Some 44,176 Palestinians have been killed since the start of Israel’s military campaign in Gaza, according to the Gaza health ministry.
The ministry does not distinguish between civilians and combatants in its count, but it has said that more than half of the fatalities are women and children.
The war began when Hamas-led militants stormed into southern Israel on 7 October 2023, killing some 1,200 people and taking another 250 hostage.
US envoy Amos Hochstein was in the region this week to try to end more than 13 months of fighting between Israel and Hezbollah, ignited last October by the war in Gaza.
Mr Hochstein indicated progress had been made after meetings in Beirut on Tuesday and Wednesday, before going to meet Israeli Prime Minister Benjamin Netanyahu and defence minister Israel Katz.
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