Wings Over Scotland

We're just beginning to see how the future of the UK will look under austerity. The full horror of the cuts may not be due to bite until later in 2013, but already we can see where and how they're likely to affect the UK population. Among the most controversial of these measures (so far) are the proposed regional levels for pay and welfare.

The regional pay proposals would see public workers paid less the further from the south-east of England they work (although devolved services in Scotland would be spared this), while the regional welfare payments would see a person on benefits paid less if they live in a poor area of the UK.

At present, government jobs are split into pay bands, with those on a certain band in one occupation earning roughly the equivalent of another public sector worker on the same band in another occupation. There's room for manoeuvre within the bands, but not much. These banding brackets are agreed through national pay negotiations by unions, ensuring that staff are treated fairly and consistently regardless of where they work. However, the creation of regional pay proposals puts an end to that idea.

No longer would national negotiations provide the agreements on wages and conditions, as it would be up to local negotiations, and even then the waters are muddied further as it's not clear whether the wage rates will be based on the going rate at the employment address or the employee's home address (which could quite conceivably be in different regions), giving rise to some strange outcomes.

For instance, if the employment address is used then an employee living in an affluent area and working in a deprived one may see their wages fall significantly, thereby inflicting a disproportionate reduction relative to their cost of living. Alternatively, if home address is used then the employee from the affluent area may be paid more than a colleague doing the exact same job but from a poorer area. In today’s commuter society it could make for some strange permutations.

It’s easy to see the benefits the Tories plan to reap from this plan, as with no national unity the unions would be severely weakened in any negotiations, strengthening the Governments hand to force through conditions that suit them. Without national action, strikes will not have the same effect, the power of the unions will be reduced and the terms of employment for many employees will be up for grabs. With the limited resources of the unions being needed to analyse and respond to multiple negotiations it doesn’t take a leap of faith to accept that this will have a detrimental effect on workers due to lack of resources.

In this proposed system public sector workers would be expected to work for the equivalent of private sector wages in their region. This would bring about a situation where public sector workers such as civil servants would be paid more for living in the expensive south-east of England, while civil servants in the Western Isles would be paid significantly less for undertaking the same job.

This already happens to a degree with the London weighting allowance, a minimum £3,000 payment on top of wages for public sector workers living and working in London to cover higher costs. If we just look at civil servants, not including other English public sector employees in health, education, policing, the MOD or other front line services) there are 464,000 civil servants in the UK as of Q1 2012 (a significant reduction since Labour’s time in power), of which 16.4% are in London (76,096).

The London weighting allowance of at least £3,000 a head (it can be considerably more) makes London civil servants cost the taxpayer a minimum of £228 million on top of their normal salaries just for being situated in London, effectively draining the public purse of that money each year without providing any additional services for it, while also pumping an extra quarter of a billion pounds into the London economy.

It's strange that no-one ever thought of removing these back-office jobs from London so that the money can be saved, as there's no need for them to be located in the capital – the services provided are not public-facing and can be undertaken anywhere. But rather than dispersing the London-centric civil service to elsewhere, we have the coalition attempting to reduce the wages of those outside the M25 to cover the increased costs of wages within it.

Similarly, on welfare the result of the Tory changes mean that as with pay rates, individuals in regions with a lower cost of living (mainly due to being poorer) will be expected to accept less than those claimants in identical situations but living in more affluent areas. This seems counter-intuitive, as the people in more affluent areas will already have access to better facilities, transportation links and job opportunities, but are still being given more support regardless.

In either situation, we can see that the biggest losers are those outside the protected zone of south-east England. If we stick with the Western Isles as our comparison, the government's reasoning is that the cost of living is lower in the Western Isles than SE England, therefore pay rates and benefits should also be lower so that the neither side is financially better off after paying their bills and living expenses. The argument goes that wages and benefits in the rich South East need to be higher as goods and services are more expensive with the result being that both sets of people are comparatively equally well-off.

Of course, this argument has a few holes in it. For instance, the cost of fuel, insurance, food, clothes, a car, phone connections and broadband are roughly equivalent regardless of which country of the UK you live in, with the main differences being between rural and urban dwellers, not regions. These basic costs will, along with a mortgage or rent and local transportation, make up the bulk of the cost of living.

Inhabitants of rural areas tend to have higher distances to travel, may not be connected to energy grids and may have no access to (lower-priced) supermarkets for food, clothes or fuel, leading to a cost of living disproportionately higher than general indicators of local wage rates and property values would indicate. But other than being an unfair and discriminatory way to allocate resources, the regional pay and welfare proposals also have another more subtle side effect – the regional escalator.

By reducing the wages and welfare of regions outside of SE England the UK government creates a situation whereby the best, most talented and qualified public sector workers will be drawn to the more affluent south-east in search of higher wages. In addition to this, welfare claimants who are living in impoverished areas may well decide to up sticks and move to the more affluent areas, because if you're going to be poor you may as well be poor somewhere nice. The result is a pull towards the wealthiest regions to the detriment of the rest, especially rural communities.

The pay proposal will see poorer regions' best talent drained away over time, ensuring that wealthy areas get the best public servants (nurses, doctors, police, managers, administrators etc) while disadvantaged areas are lumbered with what’s left. Productivity in wealthy areas increases with better people, but reduces elsewhere as talent is lost. Of course there will be exceptional individuals to whom public service is a calling not just a job and who choose to remain in the reduced wage areas, but they are few and far between.

This movement of people and capital exacerbates what was already a vicious cycle – as you attract the best people and the higher wages that go with them to an area, along with the economic migrants on welfare, you force up the cost of living due to reduced housing supply and higher demand, and you also attract more business to the area which when combined with the additional wealth creates inflationary pressures in the local economy.

As a result you'll see the introduction of higher salaries and benefits in the affluent area based on spiralling cost of living, while at the same time the reduction in demand in poorer areas will have deflationary effects. Less demand means less wages and benefits to the poorer area, while the affluent area is given even higher wages and benefits that in turn attract more people that push up house prices and rents – and so on, and so on. This is the escalator, a policy that if followed to its logical conclusion will only accelerate the concentration of the nation’s wealth into an ever more expensive bubble in the south-east.

So why do the Tories like this idea? It’s simple really. The regions that will benefit the most from higher wages and benefits are within the Tory heartlands of the south east. They'll also benefit from attracting the best people, ensuring that it’s their regions which get the best care and services available. Further to this the inflationary pressures of the escalator mean that rental rates will be maintained at artificially high levels and homeowners will see increasing property values, giving them greater “wealth” based on the same voodoo economics as the last property boom.

In effect this creates another credit bubble, and acts like a private pension pot that allows those in the south-east to buy houses in one of the devalued regions off the back of their higher wages and the higher returns from their south-east property. The evidence can be seen in today's extraordinary revelation that mortgages are now cheaper than renting in most of the country – but, crucially, are less and less available to those who aren't already rich enough to pay crippling deposits.

Those advocating the regional pay and welfare proposals do so from a keen sense of self-interest, aimed (for political and financial benefit) at increasing and entrenching the gap between the haves and the have-nots.

The solution is not to reduce wages in the remote areas, starving their economy of cash and ruining their industry. The solution is to maintain universal levels across the UK while de-centralising as far as is possible from London and the South East where 24.83% of all public sector and 26.7% of Civil Service jobs are based. A first step would be to scrap the London weighting allowance and give civil servants motivation to be based outside the M25 (and the costs that accompany it).

There would clearly still be a large number of public-facing jobs that would have to remain within the M25 zone to service its population, but enough administration and management work could be shifted to reduce costs significantly. If this is then coupled with the Scottish Government's approach of shared services and back-office rationalisation then the cuts to front-line services could be mitigated to a great extent.

Such a strategy would reduce costs, maintain services and ensure fairness across the UK. Is it likely to happen? Certainly not while the Tories are in power, as their goal is not merely the reduction of state spending but so far as is possible the removal of the state completely. The Tories have no motivation to make government more efficient while being just as effective at delivering front line services – just an ideological motivation to make government smaller until it cannot do the functions previously undertaken, ensuring that privatisation becomes a viable or even necessary alternative.

This state Ponzi scheme is Tory in origin, but was enthusiastically embraced by 13 years of Labour governments in their pursuit of "Middle England" voters. Labour has already conceded the regional-variation principle. The poorest people in the UK are about to have even more of their wealth distributed upwards.

The original version of this article appeared on Wings Over Scotland.