Whether it is before the summer parliamentary recess or in the
autumn, the government must eventually make some choices about
what pay increases to offer workers in the NHS, schools, police,
and beyond. These choices could come as soon as this week. To
make sense of them, it is useful to consider a rather fundamental
question: what is the objective of public sector pay policy? What
is it, and what should it be, trying to achieve?
Public sector pay policy is too blunt a tool to achieve
distributional objectives, and is not the appropriate tool for
managing either inflation or the overall level of demand. Fears
of a ‘wage-price spiral’ in the public sector are overblown,
given the fact that most public sector goods do not have market
prices that can rise in response to higher wages. One would have
to believe that public sector pay awards act as an important
benchmark for the private sector. This is certainly possible, but
awards of 4 or 5% seem unlikely to push up economy-wide
expectations in a way that awards of 10 or 11% might
(particularly when average pay in the private sector is already
growing at an annual rate of 8%). Any additional demand injected
into the economy could be absorbed by offsetting tax rises or
spending cuts or, if additional borrowing is used to fund pay
rises, by tighter monetary policy: interest rates, not public
sector pay awards, are the right tool for managing aggregate
demand.
Instead, pay awards should be set so as to ensure that the
government can attract, retain and motivate the appropriate
number and mix of staff required to deliver on the government’s
public service objectives. These objectives are subject to fiscal
constraints. Giving bigger pay rises without the requisite
funding would necessitate cuts in headcount and/or an acceptance
that some public service objectives (such as clearing the NHS
backlog) cannot be met. Giving bigger pay rises with the
requisite funding would eat into the fiscal headroom available
for tax cuts, and would likely require higher borrowing. Or, the
government may decide that it wishes to scale back its public
service objectives, in the face of us becoming poorer as a
nation, and to make do with fewer and/or less skilled public
sector workers.
Ben Zaranko, Senior Research Economist at the IFS and the
author of the briefing, said:
“Public sector pay policy should be set to ensure that the right
people, with the right skills, are in the right places for the
government to deliver on its public services objectives. It
should not be used for achieving distributional or broader
macroeconomic objectives. If the government is concerned about
the plight of low-income households, or about the overall level
of inflation or demand in the economy, there are better tools
available.
Instead, pay awards should be set with the objective of
attracting, retaining and motivating the appropriate number and
mix of staff across the public sector to deliver public services
with the desired level of quantity and quality. The question is
what that desired level should be. Reducing the government’s
public services ‘offer’ is a coherent response to a series of
global economic shocks that make us poorer as a nation, and this
might mean making do with a smaller and less skilled public
sector workforce. But we should be honest about what that implies
for the NHS, schools, and other public services.”
Read the full observation on the IFS website:
https://ifs.org.uk/publications/16133
