The wave of strikes that has swept the UK is hitting the economy harder than initially expected — and the disruption is set to continue, as health and teaching unions lay plans for industrial action that could stretch until Christmas.
Chancellor Jeremy Hunt argues that while the impact of NHS strikes on patients is “incredibly regrettable”, the short-term hit to growth is a price worth paying if it helps curb inflation.
Economists agree the short-term hit to GDP is not big enough to change the outlook for the UK economy this year — although most also think a more generous public sector pay deal would make little difference to the inflation outlook.
Far more important, however, is the long-term impact on the UK workforce of a slow-burn staffing crisis that is straining health services to near-breaking point and damaging the quality of education.
“There is a legacy that is hard to see,” said Paul Dales, at the consultancy Capital Economics, who believes that lengthening NHS waiting lists are a factor in the post-pandemic contraction in the UK labour force.
Since last June, when rail workers began walkouts — followed in swift succession by postal workers, nurses, ambulance drivers, teachers, and staff at a swath of government agencies — the number of working days lost to industrial action has reached the highest sustained level in decades.
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Office for National Statistics surveys show how this has affected different sectors. In the run-up to Christmas, rail strikes led to cancelled bookings in the hospitality sector at the height of party season, while postal delays hit retailers and many other businesses.
But the ONS noted that some economic activity was diverted, rather than destroyed — with taxis and car hire companies receiving a boost from stranded travellers, and some pubs in residential areas winning custom from revellers unable to reach city-centre office parties.
Since the turn of the year, however, the disruption has been centred on hospitals, schools and public bodies ranging from the border force and passport office to the British Museum. This looks set to continue, even as disputes with rail and postal unions are inching towards a resolution.
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In February, these walkouts checked growth in an otherwise resilient economy. Service sector output was dragged down by a contraction of 1.7 per cent in education and 1.1 per cent in public administration. Over a three-month period, human health activity was 3.1 per cent lower than in the previous three months.
Harder to count is the cost of patients and parents unable to work with classes and treatment cancelled. The ONS found only a small minority of people were unable to work during rail strikes, but a majority of parents would need to cut their hours or miss work if school strikes continue.
“It matters because of how long it’s going on for . . . we will be talking about six months or so where the cumulative impact is going to be quite large,” said Andrew Goodwin, at the consultancy Oxford Economics.
Goodwin noted that while output in the sectors affected returned to its previous level in months when no strikes took place, it did not bounce back far enough to repair the damage done by walkouts.
Other economists say the short-term disruption from strikes will not change the trajectory of an economy that is currently faring better than expected on the back of lower wholesale energy prices.
Even with strikes, it looks as if the winter recession story has evaporated,” said James Smith, economist at ING.
But this does not mean the government can allow pay disputes to drag on without consequences for the economy.
While most economists do not buy the chancellor’s argument that higher public sector pay would stoke inflation, they say the bigger worry is an unresolved recruitment and retention crisis that is eroding the capacity of the NHS and schools system. This could have serious long-term effects on the economy, since the worsening health of the population is keeping increasing numbers out of employment.
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Andrew Bailey, the Bank of England governor, has repeatedly highlighted this increase in economic inactivity due to ill health, as a development that is likely to stoke inflation and result in higher interest rates than would otherwise be needed.
Smith said anything that exacerbated the UK’s problems with labour shortages could have a longer-term impact. “Clearly issues in the NHS are part of that story,” he said.
More important than the size of any public sector pay rise is how it is funded.
If the Treasury seeks to squeeze spending in other areas to allow for higher wage settlements, the overall effect could be inflationary, Goodwin argued, because public sector output would be lower.
“The austerity debate of the last 15 years has shown that squeezing departmental budgets to do more with less ultimately just makes them do less.”
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