Rebalancing the pay and pensions of public sector workers so that they are in line with that of equivalent workers in the private sector would save £6.3bn a year in public spending, according to a report from the Policy Exchange think tank.
This money would be better spent on tackling local unemployment and could create at least 288,000 private sector jobs – or the equivalent salaries of 332,000 more nurses or 252,000 more teachers – in some of the areas of the country suffering most from the impact of the recession, the report said.
The ‘Local Pay, Local Growth’ report reckoned that the public sector ‘premium’ – the extra pay a typical public sector worker gets over that of a private sector worker – now stands at around 7 per cent for the average worker. Combined with increased generosity in pensions the total ‘premium’ is nearly 14 per cent for the average worker in the public sector. But in some parts of the country, some public sector workers are seeing premiums over their private sector counterparts that are as high as 25 per cent, the think tank claimed.
The report, co-written by a former Treasury civil servant, argued that the situation had arisen because of the system of national pay bargaining, which means that workers are paid the same amount regardless of where they live. It recommended abolishing this system and allowing local public sector employers to choose systems of pay that reflect local living conditions and vary pay awards by the performance of employees.
The report said that, despite accounting for around £180bn of government spending (12.3 per cent of GDP) – over half of all public money spent on schools, hospitals and the police – the current system of paying public sector workers by nationally-set pay bands is unfair to public sector workers in high-cost areas whose living standards are worse because their pay can’t be increased above the national rate.
The system also damages vital public services because local schools and hospitals struggle to recruit and retain the right staff in high cost areas. Recent academic studies have shown that this can lead to a drop in educational attainment in schools and a rise in deaths in hospitals. And it damages the economy since it wastes valuable public money that could be used to boost growth and cut unemployment on areas being hit hardest by the recession
Moving to a system where public and private sector pay and pensions are aligned would take time so in the short term, the think tank recommended a permanent freeze on annual pay scale uplifts and the abolition of automatic pay progression points. Pay increases for public sector employees across the country should then be based on a system of performance related pay – with total increases in each area tailored to reduce the existing pay differential between public and private sector employees.
Savings would be ring-fenced for extra public expenditure in the areas affected. Nowhere would see a fall in public expenditure as a result of these policies.
The think tank predicted that any move to abolish national pay bargaining would be met with significant opposition from trade unions but it called on the government to push ahead with the reforms because they would deliver increased growth, reduced unemployment and better public services.
Matthew Oakley, co-author of the report, said: “The current system of national pay bargaining is bad for the economy and bad for public services. Moving to a system where local public sector employers can decide how to negotiate salaries with employees will enable top performing public sector workers to be paid more, increasing productivity and improving public services.
“Our proposals would mean that not a single penny would leave poorer regions. All the money would be ploughed back into reducing unemployment and boosting growth in the poorest parts of the country.”