GOVERNMENT, EMPLOYERS and unions are facing a tough challenge in forthcoming talks on a new national pay agreement. For the economic backdrop to their negotiations will make consensus difficult to achieve. As the current agreement expires after 27 months, workers have on average received no real increase in pay over the lifetime of the accord. Nominal wage gains have been eroded by inflation which has accelerated again despite expectations that it would weaken in 2008. The annual rate of consumer price inflation rose to 5 per cent in March, from 4.3 per cent in January.
For the Government, this sudden surge in inflation is the latest in a series of economic reversals that also raise questions about its forecasting abilities. So far this year, tax revenue has been far less than the Government's own estimate. And economic growth has decelerated more rapidly than it anticipated. A strong euro should have helped depress inflationary pressures by lowering the price of goods from Britain and the US, which account for more than 40 per cent of our imports. Over the past nine months, sterling and the dollar have lost one-sixth of their value against the euro. However, the strong euro has had a minimal impact on our inflation rate.
Economic difficulties at home are mirrored by greater financial uncertainties abroad as the world's two major central banks, the US Federal Reserve and the European Central Bank (ECB), struggle to address the fallout from the global credit squeeze. In America, the Fed has cut interest rates aggressively to fight economic recession but at the risk of a weaker dollar and higher inflation. In Europe, where the inflation rate (3.5 per cent) is at a 16-year high, the ECB resisted pressure last week to lower interest rates. It fears inflation more than an economic slowdown. The ECB is worried that a wage price spiral could embed inflationary expectations in the financial system which would prove hard to reverse.
A similar challenge on pay now confronts all the participants in the national wage talks. The employers may well press for a pay pause as an element in a new accord. The trade unions, however, have claimed that as workers got no real pay increase under the current agreement, this amounts to a de facto pay pause. And next time they will be pressing for an increase in excess of inflation. But with inflation now at 5 per cent, the real risks of a wage price spiral which would push inflation even higher and result in a loss of competitiveness and of jobs, should be obvious to all.