Former Bank of England Monetary Policy Committee member David Blanchflower has issued a stark warning against cutting public spending during the recession (external website). In Blanchflower's words:
If you want to transform a recession into a depression, go ahead and cut public spending.
Last week we reported that the storm clouds are gathering around public sector pay for 2010, with workers in the sector likely to see pay awards radically constrained by the recession and by deep public spending cuts.
Chancellor Alistair Darling has indicated that he is currently engaged in making tough decisions on public sector pay (external website) for 2010. Darling said:
Public sector pay obviously has got to reflect prevailing conditions [...] We will decide on our pay policy over the next few weeks.
Earlier this week, we noted the potential for a downward wage-price spiral to develop over the coming months, in which falling pay awards and collapsing inflation each serve to pull the other further downwards. Ongoing stability in public sector pay awards is currently propping up the headline pay award as measured by IRS.
Therefore, even if the worst of Blanchflower's predictions did not come to pass, restraining public sector pay awards in 2010 could help create a downward wage-price spiral.
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