Tory turmoil over public sector pay freeze shows they are as out of touch as Norman Lamont was three decades ago

Phillip Hammond has refused to increase the one per cent ceiling for public sector wages. He claims to be acting responsibly, but he is damaging the future prospects of this country.

He says he will not spend on consumption but will invest in infrastructure, because the country can’t afford the former. But how does he distinguish between consumption and investment?

Is a road more valuable to a future economy than an educated child? Is the building of a hospital a worthwhile investment while money spent on training nurses is considered wasteful consumption? This makes no sense.

It was Ed Balls who argued that we should loosen our grip on the deficit, but only for investment not consumption. The Tories now accept this principle in the same way as they accept that public spending boosts GDP, while austerity causes economic contraction. We make the arguments, they dismiss them, then they adopt them.

The problem with Ed Balls’ principle is that it apparently assumes that investment and consumption are a binary choice. One is by infrastructure investment, the other is public sector wages that have no long term value to the economy’s productivity. But a future of skilled workers and healthy people is just as good an investment as that on roads and bridges. The rule should be whether there is a productivity “pay off”.

Are the police not an investment? If crime is allowed to become established and institutionalised it costs ten times as much to regain control later. Should we allow the murder rate to rise, knowing the effect this would have on future generations, on the logic that we don’t want to land them with the bill? The ongoing fight against crime is also an investment in our economy, since companies and workers are victims as well. Should this be regarded as consumption or investment?

The 2010 discussion on austerity versus a Keynesian approach was rather faulty on both sides because both Gordon Brown and George Osborne believed we were going through a temporary slowdown. Ten years on from the credit crunch, and the downward pressure on wages continues. It wasn’t so temporary, but it will end eventually.

However Hammond’s remarks that recovery is just around the corner have no basis. He sounds like Norman Lamont discovering his green shoots. These remarks do not lend him credibility. He should learn to understand the cause.

The internet and globalisation are pushing down wages and interest rates. If a British company can outsource their accounts to India then a bunch of British accountants are out of a job and willing to work for less money to get back in work. This downward pressure on wages is not easing yet.

The first consequence of this low wage period is the low tax take. The second consequence is that interest rates are being pushed down along with low wages. This means that the massive debt the Tory government has created has an incredibly low repayment. The total interest payments on government debt are about the same as that paid by Brown when he became chancellor in 1997. In other words the principle sum is huge but the repayments are perfectly affordable. And it is the repayments that matter.

If we wait for wages to start rising, then interest rates will rise at the same time. Then we will have missed the opportunity to borrow at rock bottom rates. A future generation will have to borrow at great expense to fix all the stuff we didn’t do because Hammond said he didn’t want to land them with debt. They will not be grateful.

It’s not a question of whether the deficit increases or decreases. It is a question of whether the public finances are under control. Losing control of the nation’s finances would be a terrible thing and, if we are to win the big arguments, Labour should work hard to persuade voters that we fully understand this.