The public sector pay gap and what would it cost to reduce it 

A couple of articles over the weekend consider the background, whether the government’s stance is sustainable and the “affordability” of reducing it. – Owl

The rising pay gap

David Smith (Extract)

…What can be done about our dysfunctional labour market? Starting with strikes, the root cause is similar. For public sector workers, and for those where the government stands behind employers, such as the railways, the biggest falls in real wages are happening.

A situation in which private sector pay is rising by nearly 7 per cent a year, against public sector pay growth of 2 per cent, would not be sustainable in any circumstances, let alone when inflation is in double figures.

A government that, admittedly under a different prime minister, was willing to announce big unfunded tax cuts will have to find more money for public sector pay settlements. A 19 per cent pay increase, demanded by England’s nurses, is impossible to justify. A 7.5 per cent increase, which the Scottish government has offered to its nurses — avoiding strike action — is not.

There is little danger that higher public sector pay settlements would trigger a wage-price spiral. Rather, it would be public sector pay catching up. The government wants to limit strike action by essential workers by legislating for minimum levels of service, but that is a long way down the track and of little relevance to the current disputes. The Treasury, of course, gets back some of the cost of higher public sector pay awards in tax and national insurance. Bigger public sector pay increases would flow directly into the economy in these recessionary times….

How much would a public sector pay rise really cost the UK government?

Rishi Sunak called out

Phillip Inman 

Rishi Sunak was called out last week for saying it would cost £28bn to prevent inflation eating into public sector wages. According to No 10, a 10% pay rise would cost Britain’s 28m households £1,000 a year in higher taxes.

Not according to the Institute for Fiscal Studies, which says the Treasury’s sums don’t add up. So how much would it cost to give public sector workers a pay rise?

A pay rise of 10%

Ben Zaranko, an economist for the thinktank, says that even using Sunak’s methodology, the figures are wrong. The total public sector pay bill in 2021/22 was £233bn. Using the 10.1% average figure for the consumer price index forecast by the Office for Budget Responsibility, “the cost would be £23.5bn”.

The government has already agreed to finance a 3% rise, so the extra cost is only £18bn, he says. It could be as low as £13bn if the government’s fresh concessions for teachers and other groups are factored in as “already paid for”.

Ministers should also expect to get back about 30% of the extra spending from higher income tax and VAT receipts, reducing the bill to £8.5bn.

A pay rise of 7%

The RMT has called for a minimum of 7%, while some healthcare unions have suggested they would accept a similar amount. If all public sector workers were offered 7% rather than 10%, the total extra bill would come down from £18bn to nearer £12bn – about £9bn with extra concessions stripped out. About £4bn would flow back to the Treasury in higher tax receipts, leaving an extra £5bn bill.

Will a pay rise push up inflation?

A below-inflation public sector pay rise will not increase inflation, especially if lower-paid staff are the biggest beneficiaries of a deal. The public sector does not increase its charges to reflect higher staff pay, as private-sector firms might. The extra spending power given to public-sector workers pay is also likely to be spent on energy bills and food, which are costs dictated by global markets.