Oh, for the good ol' days

Michael Taft14/12/2009

Michael Taft: With public sector pay and social welfare cuts, with the Minister announcing a ‘national downward adjustment in wages’ (that’s pay cuts across the economy), and with the Government now sizing up public enterprise (which isn’t part of the Exchequer pay bill), it’s informative to look back at the previous ‘tough budget’ days – 1987 to 1989. What happened then?

Between 1986 and 1989:

Public sector wages rose by approximately 10 percent during that three-year austerity period – or above 3 percent per year. Between 1988 and 1989, public sector wages grew by 4.9 percent in one year alone.

General social welfare rates rose by even more – by more than 10 percent, or nearly 4 percent annually. But this masked targeted increases for the lowest income groups. For instance, those on long-term unemployment assistance saw their social welfare income grow by 24 percent in the two years between 1987 and 1989.

Private sector wages grew as well. The average industrial wage grew by 14 percent, or nearly 5 percent annually.

This was a period of high debt, high budget deficits and high unemployment. Of course, this was also a period of inflation, unlike today. But the Government tried a two-hander – it kept public sector wages and social welfare rates growing, while reducing taxation to ensure that net income grew in real terms; mostly with success.

And it paid off. Between 1986 and 1989, consumer spending increased by over 21 percent. Compare that to today’s collapse of 10 percent between 2008 and 2010 – more than ten times the rate of collapse in the Eurozone.

Back then, this increased consumer spending growth contributed to a growing economy. Today, wage and welfare cuts are contributing to a deflating economy.

I’d like to think that, even at this late stage, the Minister for Finance might take note. That’s the optimist in me. But with this government and its deflationary strategies – a lot done, a lot more to do.

Posted in: EconomicsWelfareLabour market

Tagged with: DeflationWagessocial welfare

Michael Taft     @notesonthefront


Michael Taft is an economic analyst and trade unionist. He is author of the Notes of the Front blog and a member of the TASC Economists’ Network.



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