Revealed: The public sector pay delusion
Despite cap, workers get 13% more than in private sector
PUBLIC sector wages are still significantly higher than those in the private sector despite several years of pay restraint, a major study found yesterday.
The Institute for Fiscal Studies said workers employed by the State earned 13 per cent more on average than those in the private sector.
This is despite a 1 per cent cap on annual pay rises in the public sector for the past six years.
The IFS said that even if this cap continued for another three years, public sector staff would still be earning 7.5 per cent more than private sector workers by 2020.
Its analysis also said that spending on public services is still increasing and is on course to rise by £37billion in real terms by 2021/22.
Theresa May is under pressure to soften what Labour calls ‘austerity’ by lifting the 1 per cent cap on public sector wages and committing to more spending.
The IFS said it would cost £9billion a year to do as Labour is arguing and link the annual rise in public sector wages to that in the private sector.
The think-tank added that the public-private pay disparity comes at a time when – despite cuts – both public spending and the tax burden were higher than before the financial crisis. The tax burden is set to hit the highest level since 1986 within five years, it said.
The IFS warned that ending ‘austerity’ would cost the economy £33billion a year, which may have to come from further tax rises.
The comparison of public sector versus private sector salaries is based on a crude measure of average hourly wages. It compares the average hourly wage of the 5.1million working in the public sector with that of the 26million in the private sector.
It makes no allowance for skill levels in the two sectors. The public sector tends to be more highly educated, so surgeons’ salaries, for example, count towards the figure. Meanwhile, there are more lower-paid workers on the minimum wage in the private sector.
The analysis, unveiled at a conference in London yesterday, cast doubt on claims that austerity is causing widespread hardship for State workers. Mrs May has faced increased pressure since the election to put up public sector pay, with even members of her Cabinet calling for the cap to be lifted.
Carl Emmerson, deputy director of the IFS, said spending on public services was set to go up in real terms by £37billion by 2021/22, although as a share of national income this works out as a cut of £17billion.
On public sector pay, he said it would cost £9billion a year to link wages to increases in the private sector – although this would fall over time as more tax came in.
The economist produced a graph showing how the differential in pay between the public and private sectors has fallen from a peak of 18 per cent just after the financial crisis.
Mr Emmerson said the 1 per cent pay cap had been ‘justified’ so far because the disparity was now closer to the same level as before the financial crisis.
‘The squeeze so far on public sector pay could be justified by the fact we are just unwinding the increase in public sector pay relative to private sector pay that occurred after the recession,’ he added.
‘The relativities are now back to the level they were at the time the crisis hit. If we continue increasing pay scales by 1 per cent a year on average we’ll see that the ratio will continue to decline and reach its worse level since the 1990s.’
He also said Philip Hammond will have to continue tax rises and spending cuts beyond 2021/22 if he is to meet his target to balance the nation’s books by the middle of the next decade.
But the IFS report said the Chancellor could meet growing public demand for an end to austerity by ditching the target and leaving the deficit at its 2016/17 level of 2.4 per cent of GDP.
Ending austerity would cost £33bn