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18th July 2022

IFS: What should public sector pay policy be trying to achieve?

For immediate release

 

Whether it is before the summer parliamentary recess or in the autumn, the government must eventually make some choices about what pay increases to offer workers in the NHS, schools, police, and beyond. These choices could come as soon as this week. To make sense of them, it is useful to consider a rather fundamental question: what is the objective of public sector pay policy? What is it, and what should it be, trying to achieve?

Public sector pay policy is too blunt a tool to achieve distributional objectives, and is not the appropriate tool for managing either inflation or the overall level of demand. Fears of a ‘wage-price spiral’ in the public sector are overblown, given the fact that most public sector goods do not have market prices that can rise in response to higher wages. One would have to believe that public sector pay awards act as an important benchmark for the private sector. This is certainly possible, but awards of 4 or 5% seem unlikely to push up economy-wide expectations in a way that awards of 10 or 11% might (particularly when average pay in the private sector is already growing at an annual rate of 8%). Any additional demand injected into the economy could be absorbed by offsetting tax rises or spending cuts or, if additional borrowing is used to fund pay rises, by tighter monetary policy: interest rates, not public sector pay awards, are the right tool for managing aggregate demand.

Instead, pay awards should be set so as to ensure that the government can attract, retain and motivate the appropriate number and mix of staff required to deliver on the government’s public service objectives. These objectives are subject to fiscal constraints. Giving bigger pay rises without the requisite funding would necessitate cuts in headcount and/or an acceptance that some public service objectives (such as clearing the NHS backlog) cannot be met. Giving bigger pay rises with the requisite funding would eat into the fiscal headroom available for tax cuts, and would likely require higher borrowing. Or, the government may decide that it wishes to scale back its public service objectives, in the face of us becoming poorer as a nation, and to make do with fewer and/or less skilled public sector workers.

Ben Zaranko, Senior Research Economist at the IFS and the author of the briefing, said:

“Public sector pay policy should be set to ensure that the right people, with the right skills, are in the right places for the government to deliver on its public services objectives. It should not be used for achieving distributional or broader macroeconomic objectives. If the government is concerned about the plight of low-income households, or about the overall level of inflation or demand in the economy, there are better tools available.

Instead, pay awards should be set with the objective of attracting, retaining and motivating the appropriate number and mix of staff across the public sector to deliver public services with the desired level of quantity and quality. The question is what that desired level should be. Reducing the government’s public services ‘offer’ is a coherent response to a series of global economic shocks that make us poorer as a nation, and this might mean making do with a smaller and less skilled public sector workforce. But we should be honest about what that implies for the NHS, schools, and other public services.”

Read the full observation on the IFS website: https://ifs.org.uk/publications/16133

ENDS

Notes to Editor

If you have any queries please contact the IFS Press Office: bonnie_b@ifs.org.uk / 07730667013

The Institute for Fiscal Studies (IFS) is Britain’s leading independent microeconomic research institute. IFS publications are free to view on the IFS website (www.ifs.org.uk), where you can also find more information about our research, governance and funding. Please follow @TheIFS on Twitter for regular updates or contact the Press Office on 07730 667 013.

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