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The UK government’s refusal to improve its pay offer to public sector workers has led to clashes with unions, with a wave of strikes set to disrupt key services in the run-up to Christmas.
As nurses and ambulance crews prepared to join rail workers, postal staff and border officials on picket lines, Prime Minister Rishi Sunak said the current offers were “reasonable and fair”, while ministers maintained they would do so without jeopardizing public finances. Can’t be more liberal and fight inflation.
“It is high inflation that is eating away at people’s wages and that is why the government must take the necessary tough decisions to support the bank. [of England’s] mission,” a Treasury spokesman said, adding that any deviation from this “stunt . . . Long-term economic growth.”
But economists say clamping down on public sector workers is a political choice, not a necessity – and paying NHS workers better could have wider economic benefits.
Are workers paid more in the private or public sector?
Average earnings excluding bonuses in the private sector rose 6.9 percent in the past year, according to the latest official data – too high for the Bank of England’s liking as it battles to bring inflation back to its 2 percent target. But public sector earnings rose just 2.7 per cent – lagging behind the highest margin on record.
The government argues that this year’s pay awards, which vary by employee but are in the region of 5 percent, represent the biggest increase the public sector has seen in 20 years. But the Treasury has warned that these awards are more than allowed under current spending plans, meaning next year’s pay award could be lower.
Salary awards also fall well short of inflation and follow a long period in which austerity policies led to a premium public sector workers enjoyed over their private sector counterparts. Research by the Institute for Fiscal Studies think-tank shows that public sector workers earned an average of 3 percent less than their private sector peers in 2021, once bonuses were included.
They still fared better overall if generous public sector pensions were taken into account, but IFS senior research economist Ben Zaranko said this would be “little consolation” in the current cost of living, as they would have less take-home pay in the short term. .
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As a result the government is losing workers to the private sector, where employers are more willing to raise wages to deal with labor shortages and help workers cope with the pressures of living.
Can the government afford to pay more to public sector workers?
Jeremy Hunt, the chancellor, has argued that increasing pay in line with inflation for all public sector workers would cost taxpayers around £28bn – or £1,000 per household.
This calculation assumes an 11 per cent salary increase in 2023-24, for employees expanding on top of this year’s salary award.
Economists say this is misleading. Unions are disputing this year’s pay deal, not next year’s, and the government has already factored pay deals in the region of 4 to 5 percent into its spending plans.
Zaranko said that if the government were to deliver double-digit pay rises in the current financial year, the additional cost to the exchequer would be close to £10bn, although workers would pay some of that in tax.
However, any meaningful increase cannot be afforded on current spending plans. “The government has minimal headroom against its fiscal targets. It should be with high taxes,” Zaranko said.
Will higher public sector salaries increase inflation rates?
Theoretically inflation-busting pay deals could boost inflation. If the government offers workers a double-digit pay rise without being offset by higher taxes, it will inject more money into the economy, adding to inflationary pressures.
But public sector wages currently lag so far behind those in the private sector that there is little risk of the government setting a precedent for more inflationary pay rises by business.
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Tony Yates, an independent economist and former Bank of England official, said that if public sector pay rises were due to inflation, the central bank could offset them by raising interest rates in any case. However, if the government funds higher salaries by raising taxes, inflation will have no effect.
“The real objection is ideological, particularly the argument of the Tory party which does not think. [a bigger state] is consistent with conservatism,” he said.
Will a high public sector inhibit long-term growth?
The government’s argument against public sector pay hikes ignores the fact that functioning public services bring wider benefits to the economy.
There is growing evidence that staff shortages are making it harder for the NHS to cope with long waiting lists and for schools to help pupils catch up on learning lost during the coronavirus lockdown. This has long-term economic implications that may outweigh the immediate costs of raising salaries.
The real question for ministers is how much they will need to pay to recruit and retain the people they need to deliver the public services voters want.
“There is a huge macroeconomic case for retrenchment of the NHS,” Yates said, pointing to the record number of people out of the workforce because of long-term illness. “If the money can be removed at that point . . . the net gain can be really huge.
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