Public sector pay freezes

At the start of this month, the largest political parties were seemingly trying to outdo each other in the ‘macho-ness’ of their proposals on public sector pay.

Chancellor Alastair Darling announced he has written to the salary review bodies calling on them to freeze the pay of senior NHS managers, GPs and judges, while holding the rises of 700,000 middle-level public servants to less than 1%.

Shadow chancellor George Osborne responded similarly, promising to freeze the pay of four million public sector workers earning more than £18,000-a-year if the Tories are elected next year, and saving an estimated £3.2bn over the following 12 months.

As taxpayers aware of the scale of the deficit in the UK’s decidedly rocky public finances (equivalent to 14% of GDP and well above many of our international competitors), we might all understand, even applaud, such united and zealous cost-cutting by our politicians.

Even civil servants themselves might have anticipated a freeze. Haven’t there been a lot of pay freezes and cuts in the private sector this year, which have helped to control costs and supported the likely recovery of the UK economy into growth by the end of the year? This rationale seems to explain the surprising lack of staff and union opposition. But dig a little deeper, and the parallels and the justification seem much less obvious.

According to IRS, 40% of private sector reviews in the second and third quarters resulted in pay freezes. But for more than a million employees (including me), this was simply because we are on RPI-linked formulas, and throughout this year retail price inflation has been negative. So despite the freeze, we have still been enjoying real earnings growth.

Even where pay awards have been genuinely frozen, as Massimo Macarti, the European HR chief at Canon, told an Institute for Employment Studies audience recently, “pay and recruitment freezes need to be taken with a pinch of salt”.

In many cases, performance-related awards are still being made to high performers, promotions being put through, even additional benefits such as holidays being given to hang onto valuable staff and avoid the demotivation of the majority by the absence of any pay increase.

Fast-forward to next year and we have a very different situation. Even a weak economic recovery is expected to result in a rapid rise in price inflation, and average earnings increases look likely to be back up to 3% mid-2010. Fewer than 10% of private sector employers expect their pay freeze to continue.

So civil servants will in all likelihood suffer a real cut in their earnings next year.

And as private sector awards pick up to 2% or more, the risk of a drain of talent from public to private sectors may re-emerge, despite continuing high unemployment. This is particularly so if the freeze is absolute, without the sort of ‘intelligent’ management of pay costs that Macarti mentioned.

Recent years have seen a significant switch of talent from private to public sector, and the quality of public services has undoubtedly benefitted. The reversal of the trend could, as the Royal College of Midwives points out, damage recruitment and retention: “we have too few midwives, a pay freeze may well cause existing midwives to leave”.

And just how strong is the cost justification? Without further efficiency gains and almost certainly public sector job cuts, Darling’s £300m and Osborne’s £3bn payroll savings per annum will barely dent the forecast £100bn government spending deficit.

Pay freezes have worked in the private sector because of a highly unusual situation of negative inflation. Leaders have convinced employees to trust that the savings are being made for the common good. In those rare situations where there has been industrial action or the threat of it, employees have not been convinced.

But how convincing are a group of party leaders who appear to be playing political football with the living standards of millions of public sector workers?

Duncan Brown, director, reward services, Institute for Employment Studies

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