Wednesday, February 27, 2013

The Freeze That Never Was

We need a new freezer

Back in his first budget in 2010, George Osborne imposed a two-year public sector pay freeze. It supposedly applied to all staff except the low paid, who were to get a flat £250 annual increase.

Unfortunately the freeze failed, as can be seen from the path of average public sector earnings since then:

Moreover, while the official ONS earnings stats show a 5% increase, calculations based on dividing the total pay bill by the number of employees suggest the true pay increase may well have been closer to 10%.

The pay freeze was a key element in George's attempt to curtail spending, so this is a serious failure. With a starting pay bill of around £170bn, a 5% overshoot is getting on for £10bn pa, and a 10% overshoot closer to £20bn. Annually.

So what went wrong?

Well, some of it - maybe one percent - is explained by the decision to exempt lower paid employees. Some may be explained by changes in the composition of the workforce. But most of the overshoot almost certainly reflects the operation of our old friend the incremental scale.

Virtually unknown in the private sector, this is the long-established practice of giving public employees guaranteed annual pay increases simply for serving another year. So for example, a newly qualified teacher generally starts on a salary of £21,588 (outside London). But she is starting at the foot of an incremental scale which then carries her up to £31,552 within 5 years - an almost 50% increase which is awarded irrespective of fiscal restraint or a Chancellor's freeze.

Yes, of course, experience does generally make employees more valuable, and over time we'd expect to see that reflected in pay. But in most of the private sector, increases are never automatic, and in tough times for the business a pay freeze generally means just that - a freeze for everyone, irrespective of their additional experience and overall merit. The viability of the business must come first, with the understanding that individual injustices can always be righted once the crisis is past.

And remember that this non-freeze comes on top of public sector pay that is already excessive against private sector equivalents. According to the ONS, on a like-for-like basis public sector pay rates currently exceed private sector by around 7%. The Institute for Fiscal Studies comes up with a similar 8% figure.

And on top of that, 80% of public sector employees still enjoy index-linked final salary pensions that are simply not available to most private sector employees: indeed, only around 10% of private sector workers now have any final salary pension.

How much is that worth? A lot: previous estimates suggest that higher average employer pension contributions in the public sector boost total rewards by about 10%. And in addition - even after recent reforms - public sector pension contributions are insufficient to fund the projected final cost of the pensions themselves. The difference will have to be made up by taxpayers, which adds further to overall rewards in the public sector.

In the BOM book (chapter 2) we present estimates suggesting the overall overpayment - taking account of both the pay premium and the pensions benefit - is of the order of 30-40%. In money terms that's somewhere in excess of £50bn pa, a sum that would go a long way towards cutting the deficit.

With such a big annual overpayment, the failure of George's freeze is worrying. In fairness, he clearly recognises the problem, and has at least attempted to tackle it - both through pay and action to reform pensions. But he hasn't done enough. And replacing his freeze with a 1% future cap was most unwise.

We will return to this.


  1. "We will return to this."

    Oh please do. It's great to have you back.

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  2. If the stats are available it would be interesting to see who in the public sector is getting all the perks. Purely anecdotal evidence seems to suggest that the lowest paid public sector workers are either on 12 month contracts with no long-term security or benefits, or have had their jobs outsourced.

    My wife works in care and is put off the public sector by the job insecurity.

    It seems that the upper echelons, the middle-senior managers are getting the lions share of taxpayer's money at the expense of the poorest in the public sector.

  3. Anonymous1:03 am

    £50 billion, that's gob smacking but civil servants have their contracts signed in the blood of the taxpayers. Ah God the lawyers have inherited the earth and it's an EU legal thing doncha know [civil servant employment contracts], it also makes 'em nigh on un-sackable. All are - water tight contracts, blame Labour, blame the unions, common purpose and in the end the Brussels monster because that's who our civil servants actually answer to.

    What is needed are; New contracts, a new beginning and and end to the 'untouchables' the sacrosanctity of big state government.

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  4. Are you underestimating the pension cost?

    My local council states that its employees contribute 7% of pay to the local government pension scheme, and the employer (ie: council) contributes 21.5%.

    Meanwhile, this BBC article from 2012:

    States that of 23 million private sector workers in the UK, only 3.2 million are in a workplace pension scheme with employer contributions. And that's any kind of employer contribution, including defined contributions with tiny employer contributions.

    The average gap between public sector employer contributions and private sector employer contributions surely has to be greater than the 10% you use?

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    Workplace Pension Scheme & Automatic Enrolment Pension

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