Karl Williams is a Senior Researcher at the Centre for Policy Studies.
Public sector unions are agitating for significant pay increases. This week’s crippling rail strikes are just the start: teachers, nurses and civil servants all look likely to follow suit.
With inflation running at nine per cent and projected to reach 11 per cent, It’s easy to understand why public sector workers are unhappy. But those very inflationary pressures are why the Government needs to hold firm.
Given the hardships facing private sector taxpayers and the ruinous state of the public finances post-Covid, significant public sector pay growth is neither fair nor affordable.
As things stand, public sector pay increases are supposed to be capped at 2-3 per cent. That is going to mean a significant real-terms decline in earnings for many public sector employees.
Understandably this is causing a lot of anxiety, and the unions are pitching their demands accordingly.
The more absurd pay demands – inflation plus five per cent, for example – are easy enough to dismiss as negotiating ploys. Demands for pay simply to track inflation are superficially more persuasive.
Large pay rises for public sector workers are needed, so the argument goes, to preserve living standards against erosion by global economic forces unleashed by Covid and Putin.
Yet there is a fundamental principle of fairness at work here.
Private sector workers – the people ultimately footing the public sector wage bill and paying for those nice pensions with their taxes – are suffering too. According to the latest data from the ONS, average weekly earnings in the private sector are also lagging well behind inflation.
Ah yes, say the strikers, but private sector pay was up by 5.5 per cent year on year in April. Average public sector pay was up by 1.7 per cent, so state employees are facing a bigger squeeze right now.
Moreover, the last Budget promulgated the principle that public sector pay growth should ‘retain broad parity with the private sector’. Union bosses have not been slow to invoke this principle: sans inflation-busting increases, parity at least should be maintained.
But digging further into the data, this argument does not stand up to scrutiny.
Breaking pay down by industry sector and indexing it to March 2019 (for a pre-Covid baseline) shows that most of the pay growth of recent months is actually just bringing chunks of the private sector back up into line with the public sector, along the pre-Covid trend. (See the graph at the top of this post.)
The major exception distorting the headline numbers is financial services. Earnings growth there has been robust since early 2021 (when global M&A activity began overheating).
So pay growth inequality is not so much between private and public sector workers as between a small minority of bankers and everyone else. Plus ça change.
The convergence of most of the private sector back towards the level of the public sector is even more apparent when bonuses are stripped out, as in the graph below. Although interestingly, it’s not just financial services where bonuses have been a major factor in pay growth in recent months, but also manufacturing, construction and retail/hospitality.
Presumably, this reflects a tight labour market and record vacancies, with employers using bonuses to attract and retain workers.
Of course, public sector workers do not receive such performance-related pay awards. But what they have instead is the public sector pay premium, estimated at seven per cent by the ONS (controlling for job characteristics and taking into account bonuses and pension contributions).
In addition, public sector workers benefit from much greater job security. This became starkly apparent during the pandemic: while private sector jobs, hours and wages were being cut, public sector earnings more than held up.
Yet having weathered the pandemic relatively well, strikers are now demanding that factory workers and restaurant staff underwrite pay increases for rail workers with salaries well above median earnings, not to mention all those civil servants working from home in defiance of Jacob Rees-Mogg.
Given that private sector earnings are still not yet fully back on track – at parity, one might say – with the public sector trend, this is manifestly unfair.
Demands for greater pay growth might be more persuasive if there was any evidence of durable improvements in public sector productivity. But the opposite is true. Going by ONS measures, productivity cratered during the pandemic and at the end of 2021, was still 5% below 2019 levels.
Remote working might be part of the story here – the goings-on at the FCDO during the fall of Kabul are certainly suggestive. In any case, public sector efficiency drives announced by Rees-Mogg and Sajid Javid are clearly badly needed.
Strikes, in contrast, will undermine public services still further, adding to the colossal backlogs in the NHS, courts, and government in-trays.
It will be tempting for the Government to back down in some instances, to lessen the political headaches. But if ministers give in to one group, they will surely fold to the rest. This would have far-reaching fiscal implications.
The UK’s public sector workforce consists of 5.7 million people – a third in healthcare, a quarter in education and a fifth in public administration, with the rest in the police, the military and so on.
The total public sector wage bill (including employer pension contributions) accounts for 22 per cent of day-to-day government expenditure, coming in at roughly £200 billion. Every one per cent increase in public sector pay will ratchet up state spending by £2 billion.
Under the existing cap, the wage bill is rising by around £4 billion. If instead public sector workers were to get a 5.5 er cent pay increase (parity with the private sector, under the misleading statistics cited above), the wage bill would rise by £11 billion, leaving a £7 billion black hole.
And if they were to receive an 11 per cent pay settlement (tracking inflation), the wage bill would rise by £22 billion, with the Government having to conjure up an extra £18 billion.
That £18 billion could instead fund a 3p cut in income tax, say. That would ease cost of living pressures by letting everyone – not just public sector workers – keep more of their earnings.
In the real world though, there isn’t £18 billion to spare. The Chancellor is struggling to maintain the fiscal wiggle room to cut just 1p from income tax before the next election.
In fact, with the tax burden at a 70-year high and monthly borrowing still twice what it was pre-pandemic, a chunky increase in public sector pay would, realistically, have to be financed by spending cuts and long-term savings – through driverless trains, for example.
But we all know the unions will oppose attempts to trim back Britain’s bloated trillion-pound state.
Ultimately, there is nothing the Government can do which will not be greeted with howls of outrage from the unions. That being the case, their threats and demands should be rejected.
These times are deeply painful for many of us. But ministers are right to hold the line against the strikers.