News

08.02.16

Public sector pay cap brings wages to lowest level in 25 years

The government’s intention to give most public sector workers a 1% pay rise every year “may prove difficult to sustain” and will create difficulties for employers trying to recruit and retain high-quality and motivated staff, the Institute for Fiscal Studies (IFS) has said.

In its annual Green Budget, the influential think tank said this could raise the possibility of even more industrial relations issues between employers and staff.

Overall, it calculated that the pay cap will bring the public sector’s wages to their lowest level relative to the private sector in over 25 years. While average pay in both sectors was around the same level last year, private sector wages are expected to grow by around 17% – yet public sector workers will have pay rises capped at 1% until at least the end of this Parliament.

“The restraint on public sector pay in 2016-17 is likely to be felt particularly strongly,” the IFS added.

“Around 80% of public sector workers are members of a defined benefit pension scheme (compared with slightly over 10% in the private sector), and from 2016–17 it will no longer be possible for those with such pensions to contract out of part of the state pension by paying lower national insurance contributions.

“This means that employees will have to pay 1.4% more national insurance on all earnings between the lower earnings limit and the upper accrual point: this equates to a reduction in take-home pay of up to around £480 per year.”

The major report also found that to meet chancellor George Osborne’s plans to run a surplus by the end of the decade, Whitehall may have to implement sudden in-year tax rises of spending cuts.

“Even if we start 2019-20 with an expectation of a £10bn surplus [or 0.5% of national income], previous experience suggests there would be a more than one-in-four chance that in-year tax rises or spending cuts would be needed to ensure an out-turn of any surplus at all,” the think tank said.

The think tank’s director, Paul Johnson, said Osborne’s target of running a surplus “in normal times” was very inflexible and radically different from those adopted by previous UK governments.

He warned that this new fiscal charter “could come at a cost”, such as through large spending cuts with very little notice.

“Uncertainty in the fiscal forecasts means that he may well have to cut spending further or raise taxes to get to surplus in 2019-20,” Johnson added.

“With public spending reaching historically low levels relative to national income, promises on tax cuts to keep and pay for, and pressure on revenues from a number of taxes, there may be more tough decisions to come.

“How he responds to any further unpleasant fiscal surprises may, more than anything we have seen so far, come to define his period as chancellor.”

Overall, however, public service spending by central government and councils is expected to be cut by 1% in real terms until the end of the decade, compared with a 8.3% cut between 2010-11 and 2015-16.

(Top image c. Anthony Devlin, PA Wire)

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