The real issues behind the public sector pay debate

Boris Johnson is the latest Tory voice to join the chorus calling for lifting the 1% cap on annual public sector wage growth. George Osborne introduced a pay freeze the first two years of the first Cameron government, and subsequently introduced the cap to adjust for years of salary increases beyond what the private sector had enjoyed. Back in 2010, public servants enjoyed salaries 15% above comparable private sector workers; today, they today have to content with real wages at the same level as 2005. More than a decade with meagre wage growth is unsurprisingly reducing the attractiveness of the state as an employer, but the fact is that the public sector pay premium has not been completely eroded. The state is still an attractive employer. A study by the Institute for Fiscal Studies (IFS) found ‘no decline in the academic attainment’ of newly hired doctors, nurses and teachers in 2015.  The news that for the first time in recent history, more nurses and midwives left the profession than joined (between 2016 and 2017, 20% more left than joined the register) hides the fact that the number of NHS nurses is at an all-time high. But with inflation rising, the case for a pay hike is gathering steam.

Chancellor Philip Hammond has so far stuck to his guns, citing the need to be fair to tax-payers as well as public sector workers. So, who is right? Boris or the Chancellor? In fact, they are both wrong.

Boris Johnson is obviously wrong when he says that the pay cap can be lifted ‘without causing fiscal pressures’. A government running a GBP 54billion deficit (2016/17) and still adding to a debt/GDP ratio of 89.3% is already facing fiscal pressures. Adjusting public sector wages will cost an estimated GBP 1.5-2 billion a year for every 1% pay increase. By the end of the parliament, the IFS estimates pay growth in line with inflation would cost GBP 6.3bn a year. The money isn’t there.

But both he and the Chancellor are wrong when they argue about ‘fairness’ and whether to give into a public ‘weary of austerity’  –  the real discussion should be about how big a public sector we want and can afford, and what pay levels are needed to attract the required staff to achieve expected outcomes. Continuously eroding the real wages will lead to problems of staff retention – any business owner could tell you that. So it comes down to a question of priorities: a continued reduction in the real wages with an acceptance of the accompanying problems, a reduction in the number of public sector workers, higher taxes, cuts in other areas of government spending or the Labour solution: more borrowing.

The Tory government is rightly reluctant to increase taxes and borrowing, but big parts of government spending has been ringfenced and finding cuts in non-ringfenced departments is increasingly difficult. That leaves staffing levels and pay. The problem is of course that no politician can know the correct staffing or level of pay for every single one of the myriad of public sector organisations. Centralized control is a crude form of management.

This then, leads us to the argument for privatization. Private businesses do know the right balance between salaries, staffing levels and demand for their product – and if they get it wrong, they go out of business. It is obvious that the application of a ‘pay cap’ is uniquely relevant for employees in government monopolies. Working for a state monopoly means no competition for your skill set and a reliance on politicians, not supply and demand, to set your wages. Allowing the private sector to deliver publicly funded services would remove any talk of a pay cap as private companies would bid up wages to a level commensurate with supply and demand. The concept of a cap would be left redundant.

Alas, since privatization continues to be anathema to the British public, another solution needs to be found. Prioritization is necessary. Lifting the pay cap means reductions in other areas of government spending, and the government should say so. And though the problem of monopoly employers dictating wages wouldn’t go away, decentralizing pay bargaining would allow regional wage differences to be reflected in public sector pay. This should be on the agenda too.

State monopolies are a sub-optimal way of delivering any service. The lack of a price mechanism distorts supply/ demand dynamics and a lack of competition hurts the consumer. The hope would be that the pay cap debacle reminds us that workers can suffer too.

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