Follow us
Publications Commentary Research People Events News Resources and Videos About IFS
Home Publications The hardest decision for ministers is yet to come: what to do about pay

The hardest decision for ministers is yet to come: what to do about pay

Newspaper article

This is an era of difficult decisions. As Michael Gove made clear last week, with growth edging into negative territory and inflation projections reaching 11 per cent, government can’t shield all of us from the consequences.

The easiest, if belated, decision was to largely, if clumsily, protect the poorest from increases in prices via a £650 payment to all those on means-tested benefits. The harder judgments have been over what to do for the rest of us. A big national insurance cut for low earners, a universal £400 off energy bills, £300 for all pensioner households, 5p per litre off fuel duty and £150 off council tax for the 80 per cent of the population in band D or below has been the answer. That is a big and very expensive package.

I’m not sure most households have yet appreciated quite how much difference it will make. Put all this together and it really does work out that a full-time worker on the minimum wage should be better off this year than last, while someone on median earnings of about £29,000 should be only very slightly worse-off, if at all, even with earnings growing less quickly than prices.

The decision about how generous to be to the non-poor is tough for two reasons: first, supporting the whole population is very expensive indeed; and second, it could be inflationary. Borrowing more and pouring more money into an economy with rock-bottom unemployment, record vacancies, nominal wage growth at its highest level in years and inflation already set to hit double figures is, to put it mildly, not without its risks.

And therein lies the reason why the government’s hardest decision of the year is yet to come. As we endure a week of strikes by railway workers, ministers will be considering what to do about public sector pay. Their decisions will affect more than five million workers in the NHS, schools, the armed forces, the civil service, local government and beyond.

The case for pay offers at or close to present inflation levels is strong. Public sector workers have done (even) worse than those in the private sector both over the past decade and over the past two years. The average experienced teacher, even before the recent spurt in inflation, is paid a good 8 per cent less than a decade ago. Senior doctors have seen falls of 10 per cent or more in their pay, while nurses and midwives are more than 7 per cent down. Vacancies are going unfilled. A further substantial real-terms pay cut will be hard for many to bear and in a hot labour market likely would lead to further vacancies that the NHS, in particular, would struggle to cope with. On top of all that, unions are flexing their muscles.

The case against is equally compelling. Departmental spending totals were set on the assumption that inflation this year would be less than 4 per cent. Big pay rises will mean a cut in workforce numbers and an acceptance that governmental priorities will need to be put on the back burner, or the chancellor being willing to accept higher spending and borrowing, pumping more money into an already highly inflationary environment.

Remember that the public sector pay bill comes in at north of £200 billion. Only a few per cent on that is serious money. These public sector offers are also highly salient. They can set expectations across the economy and push up other settlements, playing their own role in embedding inflation. If there is one overriding economic priority right now, it must be to avoid that.

So, what to do? One tempting route would be to follow the example set between 2011 and 2013 and again in 2020-21, when a pay freeze for most public sector workers was leavened by a policy of being more generous to lower earners. We are clearly not in a world of freezes for anyone, but the government could come in this year with more generous settlements for the lower-paid, while being tougher on higher earners.

That is a tempting strategy, but a risky one. Higher-skilled, higher-educated workers in the public sector generally earn less than their private sector counterparts, while lower-paid public sector workers tend to earn more than their peers in the private sector. Further compression in the public sector wage distribution over the past decade has further entrenched these differences. In the NHS, higher-paid professions have fared consistently worse than low-paid groups; senior teachers have done worse than new teachers; and senior civil servants have faced large real pay cuts.

Public service pension reforms have hit high-flyers and largely spared, and even sometimes benefited, those on lower pay. Looking at wages in the private sector right now, we are, for the first time since before the financial crisis, seeing substantially higher earnings growth at the top of the wage distribution than at the bottom.

Of course, government needn’t slavishly follow the private sector, but public and private labour markets can’t permanently diverge. There are certainly low-paid groups where pay rises are needed. But if the government wants to protect low earners, then on the whole the right way to do it is through the sorts of NI cuts and energy bill rebates already announced that benefit people across the board, not merely those it happens to employ.

As for the right overall level of pay settlements? A shock to the world economy has made us poorer. To put Gove’s point a different way, the question for government is how to distribute the pain, across people and across time, not how to avoid it altogether. That’s not possible. Different interest groups will, entirely understandably, fight their corner. But we can’t all win, and where there are winners others will lose as a result.

I’m only glad I’m not the one making these choices.

This article was first published in The Times and is reproduced here with kind permission.

More on this topic

Journal article
We show that observed behaviour can be rationalised by the fact that the shadow price of home-cooked food, which accounts for the fact that cooking takes time, has risen relative to the price of ready-to-eat food.
Briefing note
This report seeks to shed new light on the fall in employment and rise in economic inactivity amongst older people in the UK, with a particular focus on those in their 50s and 60s.
IFS Working Paper W22/21
We study the link between illness severity and the use of public health care services by the privately insured under a public health system.
Press release
The value of government support for living costs for university students from the poorest families will fall to its lowest level in seven years in the coming academic year, as maintenance loan entitlements will fail to keep up with inflation.
Press release
The number of economically inactive people – those who are neither in paid work nor looking for paid work – in their 50s and 60s has grown by more than a quarter of a million since the period immediately before the pandemic.