Even if the real wage is cut by 5%, the public sector workforce may need to be cut by more than 200,000 by 2024 to stay within current spending plans

Public sector workers will receive pay bonuses of around 5% this year, on average. That is both underneath inflation of around 10% – which means a 5% reduction in wages in real terms for millions of employees – and above what was budgeted in departmental spending plans, fixed in cash terms last fall.

Sticking to these spending plans – as the new government claims – would force departments to find around £5billion in savings this year to fund higher-than-expected pay bonuses. That could mean cutting the workforce by more than 100,000 this year to “pay” for the higher-than-expected rewards while sticking to the same overall payroll. If this drop in wages in real terms is consolidated and wages rise with inflation the following year, an additional 100,000 jobs could be lost unless more money is coming.

These are among the findings of new research from the Institute for Fiscal Studies, published today as a pre-published chapter of the IFS Green Budget 2022 (produced in association with Citi and with funding from the Nuffield Foundation).

All of the above is on top of all the additional non-staff costs faced by schools, hospitals and other public sector institutions due to soaring inflation. Much is said about the Chancellor seeking to cut public service spending to shore up public finances in light of his recent unfunded tax cuts. However, departmental regulations are already much tighter than initially expected. Any further discounts would be on top of that. Asking departments to make further “efficiencies” or “cut the fat” ignores the fact that they already have to do it just to meet existing budgets in the face of dramatically higher costs.

Even the higher-than-expected 5% wage bonuses may not be enough to allay concerns about recruitment and retention – or stave off widespread industrial action. Public sector pay will fail to keep pace with inflation this year and is likely to lag private sector wage growth. This comes after more than a decade in which public sector wages have already fallen relative to the private sector and, for many public sector jobs, in real terms. Average public sector earnings in July 2022 were 4.0% lower in real terms than 15 years earlier (compared to 0.9% higher in the private sector). The public-private pay gap is now less favorable to the public sector than at any time in the last 30 years.

On the other hand, public sector pensions are much more generous than those in the private sector, and compensation is much more pension-oriented. More than a fifth of the compensation of an average worker in the public sector takes the form of pensions, compared to less than 8% of total compensation in the private sector.

There are strong arguments for rebalancing public sector compensation from pensions to wages. Take-home pay could be increased by reducing employee pension contributions and proportionally reducing pension promises. This would immediately increase take-home pay, without increasing costs to employers, and still leave public sector workers with much better pensions than their private sector counterparts.

Bee Boileau, research economist at IFS and author of the research, said:

“Offering higher salary rewards without additional funding puts enormous pressure on departmental budgets and requires painful cuts elsewhere. Failing to offer higher salary rewards risks a wave of strikes and ongoing recruiting and retention challenges. But providing additional funding to departments would mean offsetting spending cuts elsewhere, or a U-turn on some of the Chancellor’s recent tax cuts, if he is serious about reducing debt as a share of income national. There are no easy options, and navigating these trade-offs will be one of the new Chancellor’s central fiscal choices.

Laurence O’Brien, research economist at IFS and another author of the research, said:

“Wages in the public sector have consistently fallen relative to the private sector over the past decade. Meanwhile, public sector pensions look increasingly generous relative to their private sector counterparts. The increase in the cost of living and the compression of family budgets make this system appear more and more unbalanced. Many public sector workers may well prefer to invest less of their own money in a pension via employee pension contributions, and instead receive a higher take-home pay today and a slightly less generous pension offer tomorrow. This change, if accepted, could improve the welfare of public sector workers without changing the costs to their employer. It could also prevent a potential increase in retirement options in the public sector.

Mark Franks, director of wellbeing at the Nuffield Foundation, said:

“Under current plans, public sector employees and their families will face increasing financial pressure as the cost of living rises and some workers lose their jobs. These plans also pose risks to the recruitment and retention of people in key public sector positions and will impact the delivery of vital services, which are already under extreme pressure. There is no easy way to control public spending while maintaining and improving the delivery of public services. However, cost-neutral options such as offering public sector workers greater flexibility in choosing the right balance between their salary and their pension contributions should be seriously considered.

On the comparison between public and private sector salaries, the research concludes that:

  • The gross gap between hourly wages in the public and private sectors fell from 13% in 2007-08 to 7% in 2021-22. This ignores the fact that public sector workers tend to be better educated, older and more experienced: after adjusting for this, the public-private pay gap has narrowed from around 3% in 2007-2008 to just under zero in 2021-22lower than at any time in the past 30 years.
  • Employer pension contributions are significantly more generous in the public sector. While almost half (47%) of public sector employees received an employer pension contribution of at least 20% of their salary in 2021, the same was true for only 2% of private sector employees. . The relative generosity of employer pension contributions in the public sector has increased over time.
  • When we look at the total pay gap – take into account differences in pay and pensions between the public and private sectors, as well as differences in the characteristics of employees – the public-private differential was around 6% in 2021. In other words, the total compensation of workers in the public sector is on average higher by 6% to that of their private sector counterparts. This measure has also declined in recent years, but to a lesser extent than if compensation alone is considered.

Industry Response

Geoff Barton, General Secretary of the Association of School and College Leaders, said:

“This IFS report is a much-needed dose of reality that exposes the recklessness of government spending plans for the public sector, including the potential devastating impact on schools and colleges.

“We have repeatedly warned that rising costs – including salary grants for which there is no additional government funding – are simply unaffordable in current budgets, and that schools and colleges will need to proceed with major cuts in supply.

“To be clear, these national salary awards are very necessary, deserved and should go much further. But it is just ridiculous that the government expects them to be paid without providing money to schools and colleges to pay them.

“Combined with other rising costs, this will inevitably require downsizing as this is the biggest cost and this will in turn mean cuts to the curriculum, larger classes and less support for children who need additional support.

“The idea that the government might be looking for ‘efficiencies’ on top of that is really scary.”

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Michael A. Bynum