THE BLOG

Squeezing Public Sector Pay Can't Be Done for Too Much Longer

27/02/2014 14:24 GMT | Updated 28/04/2014 10:59 BST

The uptick in growth is real and brings a welcome increase in jobs in its wake.

Of course, growth is pretty anaemic compared with what we normally get after a massive downturn and, unlike many other countries, we are not yet back to the level of output before the crash.

The chancellor therefore knows he has to be careful.

Talk of the boom times that some of the press have headlined with does not go down well with a British public who, on the whole, still feel pretty up against it.

So far, so good.

But, of course, there are plenty of public sector cuts still to come as the recent Institute for Fiscal Studies (IFS) green budget reminded us.

By the end of this financial year only 40% of planned spending cuts through to 2018/19 will be in place.

The IFS has raised some alarm bells about the viability and realism of these planned cuts, especially in areas like health.

Others have questioned whether they will all be needed if growth continues at a decent lick.

But cuts don't only affect services - they affect jobs in the public sector.

The Office for Budget Responsibility (OBR), in its post-2013 autumn statement analysis, suggested 130,000 more jobs would now go in 2018/19, taking the overall total fall to 1.1m.

These are big numbers, but if we have a growing economy they may not be as painful as when the cuts first began to take effect - when we were still in recession and the private sector was not creating opportunities for those thrown out of public sector jobs.

However, up to now, a much-missed element of all this is what is going to happen to pay in the public sector.

For many years in the 1980s when I was a raw Department of Employment and then Treasury economist, there was a whole industry looking at the relative increases in public and private sector wages.

There have always been differences in the average level of pay across the two sectors so that they are not expected to be equal.

They do different things, have different mixes of skill levels, different levels of pensions and job security and so on.

But the data usually showed that if they got too far out of sync with the long-term average differential then there would be trouble and pressure would lead them back to some sort of equilibrium.

Much talk since the crash has noted how public sector pay kept increasing or at least did not much diminish while workers in the private sector had to accept pay cuts. Many members of the press tried to drive a wedge between the two sectors and it became quite a political issue.

But since then we have had tough pay policies indeed with a two-year public sector pay freeze in 2011/12 and 2012/13, and, more recently, annual increases limited to 1%.

In its most recent analysis, the OBR said that public sector pay will rise only 0.5% in 2013/14, a large fall from what they had thought in March 2013.

Indeed the IFS analysis of what the OBR is saying suggests that, far from public sector pay outstripping the private sector, the opposite is now happening.

In fact, analysis by the IFS suggests that the pay differential this year will be back to what it was in 2007/08, before the recession took hold.

Whatever problems the private sector went through on the relative pay front seem well and truly over.

And then taking that forward the IFS says that by 2018/19 public sector pay will be 6.4% lower relative to the private sector than before the crisis.

So does any of this matter?

You bet, and it should matter a great deal to every local government chief executive, every public sector manager, every head of a government agency, every NHS or schools boss and to every minister.

Cast your mind back to the late 1990s and early 2000s when we had had a couple more years of tight budgets in the early Labour years following tightness after the 1992 ERM debacle.

There had been a strong fall in the relative pay of the public sector and it led to acute staffing problems, as recruitment and retention were both under pressure.

This was the period of a shortage of teachers and of nurses.

It meant patients waiting on trolleys or schools classes cancelled, and the quality of recruits - and of services provided - naturally diminished as people followed the price signals.

Of course, averages can hide a multitude of things going on below the surface but the policy of just holding down public sector pay forever to ease the burden on service cuts is a trick that cannot be played for too much longer.

Dan Corry is CEO of NPC, a think-tank and consultancy on third sector issues. He is a former Treasury and Downing Street economic adviser.