Of course most of the headlines were grabbed by the Chancellor’s announcement that he would impose two years of 1% pay-caps on public sector workers at the end of the current two year pay freeze (three years if you work in local government). At a stroke this announcement managed to undermine the ongoing negotiations around public sector pensions (which in part are about significant contribution increases in the context of a pay freeze); confirm the government’s intention to cut the living standards of public sector workers by 16.5%; and signal his seeming contempt for collective bargaining and fair negotiations. Having days earlier called on public sector unions to ‘get back around the negotiating table’ over pensions, the Chancellor effectively pulled the table away from them when it came to public sector pay.

Of course whether or not the government can hold to its 1% cap remains to be see. Previous governments of different political persuasions have struggled to maintain medium-term pay/incomes polices, particularly against the backdrop of turbulent economic conditions. Both Edward Heath and Jim Callaghan can testify to that.

But perhaps just as important as the announcement of the 1% cap, was the Chancellor’s call for Public Sector Pay Review Bodies to look at how public sector pay can be made ‘more responsive to local labour markets’.

Briefing the Times (here, sorry it’s behind a pay-wall), ’Whitehall sources’ implied that this was necessary because in some parts of the country the private sector had effectively been squeezed out as a result of its inability to match public sector wages. Of course this is nonsense. As the TUC’s northern regional secretary Kevin Rowan pointed out on the Today programme last week (here, 2hr 10mins) the North East has both the lowest overall wages (£200 a week less than London for full-timers) and the highest unemployment rate (11.6%) of any of the English regions. The private sector in the North East is not being ‘squeezed out’; it’s simply not creating enough jobs. Lowering public sector wages in the region will not improve this situation one iota.

The Chancellor’s announcement – which goes well beyond traditional London weighting-style arrangements – had little to do with ensuring healthy local/regional labour markets , and everything to do with signalling another lap in the race to the bottom on the pay, terms and conditions of public sector workers. It’s part of an ongoing assault on national pay frameworks – given a semblance of  intellectual ballast by the likes of CentreForum and Policy Exchange, and embedded in the government’s approach to public service reform.

Consider the government’s record so far:

October 2010 – the abolition of the nascent School Support Staffs Negotiating Body which would have helped determine pay, terms and conditions for 500,000 (mainly women, mainly part-time) class-room assistants, school administrative staff and support workers

December 2010 – the abolition of the so-called ‘Two-Tier Code’, which helped ensure that when public sector contracts were outsourced new starters had access to broadly comparable terms and conditions as their more established colleagues

December 2010 – Lord Hill, Parliamentary under secretary of state, writes to schools to stress that there is no requirement on schools seeking Academy status to stay within national pay bargaining frameworks, and that he will take this into consideration when assessing their application

I could go on – the Review of the Fair Deal on Pensions, the Health and Social Care bill which threatens a move toward localised pay and conditions, the Open Public Services White Paper with its commitment to open up public services to a broader range of providers and to decentralise ‘decision making’ to the lowest possible levels – the government’s direction of travel is clear. More fragmentation, more localised bargaining (if indeed bargaining takes place at all).

For unions this throws up some very practical problems. Resourcing hundreds, thousands or even tens of thousands of local pay negotiations would be incredibly difficult, particularly in the face of an another ideologically driven assault on facilities and facility time.  But a move to localised bargaining would not only be problematic for unions and their members. It would be bad for public sector employers, bad for taxpayers and bad for the UK economy as a whole.

Here are just five reasons why:

1) Localised bargaining is incredibly inefficient

There are over 3,100 secondary schools in England. Around 1400 of these are Academies. Lets presume that each of these schools takes Lord Hill’s advice, and decides to disregard national pay and conditions and moves instead to setting these itself. It doesn’t need a math’s teacher to deduce that this might actually consume a bit more time and effort than staying within the existing and time-served pay system.

This of course presumes that the average Head Teacher or Chair of governors has the time, inclination and skill to carry out the negotiations themselves. Many won’t. Instead they will rely on external consultants and HR advisors to do the job for them. The end result will be more time, more money and more effort – time, money and effort that could have been spent educating kids. Now imagine this scenario being played out right across the public sector. Imagine every GP consortium, every hospital trust, every local council, every NDPB, every Sure Start centre going through exactly the same process. ’Decision making devolved to the lowest possible level’. Chaotic, uncoordinated, inefficient – that’s the government’s vision for the future of public sector pay determination.

2) It could lead to an explosion in localised disputes

Localised pay bargaining will not only be chaotic, it will also potentially spark an endless round-robin of localised pay disputes. Unilateral, decisions to attack pay, terms and conditions by local councils up and down the country have led to bitter and, in some cases, prolonged disputes. At the moment Southampton, Birmingham et al are relatively exceptional cases – localised bargaining will see these sorts of disputes raise their head across the country.

3) It would reinforce and entrench existing regional economic disparities

Lets go back to Newcastle, and assume the government gets its way. A school cleaner in Newcastle now earns about  15% less than her counterpart in, say, Basildon (equivalent to the existing regional ‘pay-gap’). How does this help to boost the North East economy? How does it create new private sector employment? The simple answer is, of course, it doesn’t. With 15% less wages to spend in the local economy, the consequence of regional/local pay will be to shrink those regional economies already most vulnerable. And the fact is this will not be restricted to the public sector. Lower public sector wages will drive a race to the bottom in the private sector as well.

4) It risks opening up the gender pay gap and leading to increased gender inequality

The struggle for equal pay – at the negotiating table and in the courts – has been a constant for public sector unions and their members over the past few years. Thousands of Tribunal cases, long and complex negotiations to deliver equality–proofed pay systems (exemplified by Agenda for Change)  - its been hard, but important work. Now all of that is at risk if the government gets its way. Coupled with the abolition of the two-tier code, arbitrary pay freezes and uncoordinated local ‘decision-making’, we can expect the government’s plans to localise pay to result in a huge widening of the gender pay gap and, consequently, Employment Tribunal claims galore. But maybe the government has thought of this. They plan to charge huge fees to access justice through an ET .

5) Fragmenting collective bargaining will widen income inequality and damage the economy

As my former colleagues Chris Wright has pointed out, there is a pretty strong social and case for collective bargaining – its well accepted that high collective bargaining coverage is one reason why the Scandinavian countries have world beating levels of income equality. But there is also a more hard-nosed economic case. Writing about this in August this year Chris noted:

The FT leads on an Audit Commission report ‘Tough Times’, which reveals that  most councils have had to ‘reduce the quality and quantity of services’ they provide in the face of a real terms funding cut of £3.5billion over the last year. In addition to central government funding cuts, councils are faced with a £1.2bn funding squeeze driven by a loss of income and the government driven council tax freeze.

As well as the direct impact these cuts are having on vitally needed services, they are also having a perverse impact on efforts by local councils to increase economic activity.

This Guardian article highlights just one such example – the possible cancellation of Liverpool City Council’s support for the Matthew Street Festival. While on the surface it might appear that the loss of a ‘Beatles-themed festival’  isn’t all that important, its worth bearing in mind that Liverpool City Council estimates the £900,000 a year it spends on the festival generates around £17m for the local economy.  Its a small illustration of the economic madness of government  forcing local councils to make swingeing cuts at a time when private sector demand is so fragile. Liverpool faces cuts of £102m over the next three years.

And to top it all off, and again as Liverpool unfortunately illustrates, the Audit Commision’s report also notes that councils in the ‘deprived areas in the north, midlands and inner London saw the highest cuts’. ‘Fairness at the heart of everything we do’ seems a very long time ago.

Fairness indeed.

“The 21st century inequality, the fairness divide in our economy, [which] threatens to be about a division between the richest at the top who have been doing well, and the majority -lower and middle-income – who have been struggling to keep up: working harder for longer for less.”

Both his underpinning analysis and suggested policy responses are hard to fault. Growing wage inequality which saw wages for those at the top grow twice as fast as those in the middle; wages which for many struggled to keep pace with the rising cost of living and generated a demand for cheap credit; the need to reverse historic under-investment in skills and technology; the value of an active industrial strategy; and the need for a fairer tax and benefit system.

I would put my hand up for all of that – and its important that at a time when over 4m public sector workers face a two-year pay freeze, and wages more broadly are slipping well behind inflation, that the Leader of the opposition is prepared to speak up about the need to combat the ‘squeeze on living standards’ being faced by those on low-middle incomes.

But I thought one factor was conspicuous by its absence from the speech -  namely, the impact of falling union membership (and, linked to this, the continuing decline of collective bargaining). The fact is that growing wage inequality in the UK (and indeed elsewhere, for example, the US) is inextricably linked to the decline of unions and the constraint of collective bargaining.

Weaker unions have meant those on lower and middle incomes have seen their wages stagnate  – and the lack of any effective counter-balance has meant that while shop-floor pay has stalled the incomes of those at the top have spiralled (rising by 55% last year alone). The positive ‘union effect’ isn’t just restricted to dampening wage inequality either. As the TUC’s ‘Road to Recovery’ pamphlet set out last year, unions cannot only help to reduce wage inequality, they can also help to create and sustain the  high-productivity, high-skill jobs and industries that Ed Miliband rightly believes could underpin ‘quality jobs and a better quality of life’. They can also help to make workplaces fairer, more equal and safer.

In short, any strategy for tackling the squeeze on living standards has to see unions and collective bargaining as part of the solution. The right get this, but from a wholly different political perspective - witness the assault on unions and collective bargaining in Wisconsin, or the Economist’s recent call to arms against public sector unions.

Of course, talking up the positive role of unions is easier said than done for any politician faced with a hostile press which likes easy headlines about policy being driven by the ‘Brothers’. But not to do so,  means disregarding a potentially fundamental element of any serious strategy to  improve the lives and living standards of millions of families. Yes, we need a fairer tax and benefits system. Yes, we also need  a government committed to industrial activism and to investing in the ‘high road’ to economic success. But, our own history would also suggest, that unions have an important role to play in delivering the ‘British Promise, that the next generation would always do better than the last’.

The Code was designed to ensure that new starters working on outsourced government contracts had broadly comparable pay, terms and conditions to formerly directly employed staff TUPE’d across to private sector employers.

All this seems pretty arcane, but the upshot is that – combined with the government’s efforts to increase the role of the private, voluntary and social enterprise sectors  in the delivery of public services, and the government’s swingeing cuts in public spending - the abolition of the Code and its replacement by a set of voluntary principles, could well lead to race to the bottom in pay, terms and conditions for public service workers.

Women in particular are likely to be the big losers in all of this - something that unfortunately seems to be a consistent theme of the government’s approach to public services.

Underpinning the sugar-coated language about ‘localising power and funding’, the Chancellor announced a 26% cut in central government funding for local councils – with a cut in capital funding to councils of around 45%.

On top of the headline figures, the CSR also flagged:

• A 13% real terms reduction in ‘fires resource expenditure’ (thats fire-fighters and fire fighting equipment to you and me)
• A 20% reduction in bus subsidies and a 28% cut in local government resource grants
• The end of programmes such as the Working Neighbourhoods Fund (…a concerted drive to get people off welfare and into work) and Growth Area Funding (…financial support to major infrastructure investments)

And in a classic ‘rob Peter to pay Paul’ move, DCLG will have  to contribute nearly £900m to pay for the Regional Growth Fund.

To sit alongside these swingeing cuts in resources, local councils will be given increased ‘flexibility’  with the government committed to removing ‘ring-fencing’ of all but a few revenue grants. What this means for the ‘£2bn of additional funding’ the government has allocated to support social care is unclear, but it clearly raises the possibility it’ll be absorbed to plug the gaping holes in local authority budgets.

Whats clear is that a large part of the negative impact of the government’s cuts will be felt at a local level – and it will be local councillors who are placed in the invidious position of delivering the Chancellor’s cuts. Bad news for our communities – and bad news as well for the 4000 or so Liberal Democrat Councillors across England, Wales & Scotland, tasked with driving these cuts through. Next year’s local government elections are not too far away…

A key finding of the report is that PwC believe that the private sector will struggle to generate enough employment to offset the jobs cull which will follow in the wake of the cuts – PwC estimate that over the next four years the private sector will generate 600,000 less jobs than estimated by the OBR in June. This view is borne out by John Philpott at the CIPD. Speaking to the Times today (hence no link!) he comments,

“I would be surprised if you get what the OBR is looking at, which is essentially is strong private sector job gains.A strong automatic bounce-back is theoretically possible, but I can’t see it happening’.

The PWC comes hot on the heels of a warning from Nobel Prize winner Professor Christopher Pissarides, that the pace of the government’s cuts could create an unemployment crisis.

All of which chimes with the TUC’s repeated warnings that the pace and scale of the government’s cuts will result in ‘All Pain, No Gain’, and gives even more impetus to our call for coalition MP’s to ‘think again’ in advance of the CSR.

Last night Adam blogged about the Guardian’s report that the Treasury has estimated that the budget will cost 1.3m jobs. As the TUC predicted in our budget submission, these job losses will not be restricted to the public sector – instead, up to 700,000 private sector jobs are  expected to be lost by 2015 as a result of the government’s programme of swingeing cuts.

An article in today’s FT contradicts the Treasury’s rather rose-tinted estimate that these jobs losses will be offset by the private sector creating 2.5m new jobs over the same period. An FT survey of 12 top companies employing more than 375,000 people between them  found that they had, ‘no plans to ramp up recruitment’. As Tim Leunig at the LSE succinctly puts it,

“If the government thinks the private sector is automatically going to step into the gap left by the public sector, it is sadly mistaken’

Against this backdrop the governments decision to replace RDA’s with a potential patchwork quilt of Local Economic Partnerships poses a real risk.  Are the RDA’s perfect? – of course not. But an independent assessment has shown that they have had real economic benefits, and there is a danger that these gains may be lost as attention is focused on the practicalities of re-organising the RDA’s functions and new organisations take time to bed-in.

While a few public sector workers may happily engage in this process, I suspect the vast majority will be a little bit more sceptical of an initiative that smacks of spin rather than substance.

The idea that public sector workers, worried about potentially massive job cuts and faced with attacks on their pay and pensions , will be rushing to suggest ways that those cuts can be made stretches the imagination somewhat.

A quick glance at the ‘Spending Challenge’ web-site shows no reference to how the government will engage and consult with unions during this process – and the timescale for this initiative (from initial e-mail suggestion to fully worked out proposal to be included in the CSR on October 20) suggests a pretty superficial process.

More substantively, this initiative takes the seed of a good idea and then denudes it of integrity. Anyone who has worked in our public services knows that it’s the people who deliver those services who often know how best those services could be delivered. It’s the hospital porters, local government admin workers and classroom assistants, who have the best ideas for delivering public services effectively and efficiently.

But tapping into that potential well of expertise needs more than a web-site and an e-mail form. Real innovation requires a commitment to working in partnership –public sector workers, union reps and local managers sitting down to think about how best they can deliver services to the benefit of service users, the  wider community and those delivering the service alike. Crucially it means putting a focus on improving services, not just cutting costs.

Initiatives like ‘Drive for Change’ (web-link now removed from the Cabinet Office web-site) show what can happen if this bottom-up, collaborative approach is taken.

Is there a value in working together to improve our public services and find better ways of delivering those services – yes.

Will public sector workers be motivated to engage in the ‘Spending Challenge’ in the face of a 25% cut in budgets  across the public sector – no.

You can read some union responses to the ‘Spending  Challenge’ here and here.

Less positive is the news that London and the South East will not benefit from a new scheme to give NIC tax-breaks to new businesses. While the TUC is sceptical about the value of these tax-breaks in creating good quality employment – particularly when private sector demand is low and is likely to be hit hard by the spending cuts - the fact that London and the South East have been excluded sends out all the wrong political messages.

While many parts of southern England are prosperous, its clear that this prosperity is not evenly distributed. A recent TUC analysis of Jobseekers Allowance (JSA) claimants and vacancies advertised in Jobcentre Plus showed that London has nearly eight JSA claimants for every job vacancy. Seven of the top ten unemployment black spots are in London, including Hackney where claimants outnumber vacancies by a shocking 24 to 1, and one is in the South East.

In addition, contrary to popular opinion, its also clear that spending cuts could have a devastating impact upon public sector employment in large parts of the South & East.

Let’s be clear – when you factor in inflation, this isn’t a pay freeze, its a pay cut.

Even those earning below the Chancellor’s £21,000 threshold will be landed with an effective pay cut. For those earning £21,000 a year, the Chancellor’s proposed £250 represents an increase of less than 1.2%. RPI currently stands at 5.1%, and whatever inflation target you look at, 1.2%  for each of the next two years will represent a fall in income – and living standards - for 1.7m of our lowest paid public sector workers.

Whichever way you cut it, its clear Britain’s public sector workers won’t agree with the Chancellor’s claim that this budget represents a ‘burden shared’.

Like the other ‘Hutton review’ – the review of ‘fair pay’ in the public sector which is being headed by Will Hutton at the Work Foundation – John Hutton’s review will be provide an early acid test about whether or not the Government is serious about its commitment to engage public sector workers and to genuinely approach the issue of public sector pensions ‘openly and fairly’.

The TUC has consistently argued that public sector pensions are already fair, sustainable and affordable – lets hope that Government gives us a real opportunity to make that case, and puts facts before the easy rhetoric of ‘gold-plated pensions’.

Ireland provides a clear example of what can happen when government gets that balance wrong – and the New Statesman is not alone in suggesting that what is happening across the Irish Sea provides a possible, ‘foretaste of life under the Tories’.

Successive public sector pay-cuts totaling 12% ; massive reductions in essential benefits such as children’s allowance and unemployment benefit; and cuts in capital spending and public services including, health and education, totaling €1.8bn (and  a commitment to shrink state spending by €15bn over the next four years) have plunged the Irish economy into crisis. The Irish Government’s decision to slash public spending rather than invest in fiscal stimulus has meant the economy is on course to shrink by 15% and unemployment has risen to 12.5%. Calls by the Irish Congress of Trade Unions for the government to chart a more progressive course have fallen on deaf ears.

Another consequence of the Irish Government’s decision to take an axe to public spending is the collapse of the social partnership arrangements which until recently underpinned economic growth, and have existed in one form or the other since the agreement of the Programme for National Recovery in 1987 (PNR).

Ironically the PNR originally emerged out a consensus amongst Irish politicians, employers and trade unions that there had to be a better, fairer way to revive the Irish economy than the approach taken by Thatcher’s Conservatives in Britain. Union leaders were, ‘acutely aware of their own vulnerability at this time, given the battering which the unions in Britain had been taking since the election of the Thatcher government in 1979…Employer leaders…strongly shared the view that the ‘Thatcher approach’ was not the way to go about resolving the Irish crisis’ [1].

Now, in place of social partnership, Ireland is now gearing up for a period of further industrial unrest as unions embark on a campaign to defend public services and the livelihoods of their members.

Let’s hope that politicians in the UK draw the right lessons from what is currently happening in Ireland; and – just as Irish unions, employers and politicians did in 1987 – step back from ‘slash and burn’ economics, and instead seek to build a recovery based on consensus rather than conflict.