Sunday, November 04, 2012
A strange kind of austerity for public sector pay
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

George Osborne is knee deep in preparations for his autumn statement, on December 5, in between wondering what to do about the European Union budget.

He will have to decide how to respond to Lord Heseltine’s “No Stone Unturned” growth report. The former deputy prime minister, who brings a touch of showbiz to everything he does, has come up with a curate’s egg of a report.

Some of it looks like a bit of throwback to the patchy industrial interventionism and regional policy of the past, though menaingful devolution of economic power from London and the south-east would be welcome. His National Growth Council has echoes of “Neddy” (the National Economic Development Council), which was finally put out of its misery after three decades of existence in the early 1990s.

Other bits of the report: speedy decisions on airport capacity, and better planning, infrastructure and skills make a lot of sense. The question is whether a government that finds it difficult to pull any policy levers can manage to do so to implement some of these ideas.

The big issue for the autumn statement is, of course, the state of the public finances and whether Osborne can still meet his fiscal rules. There will be time for a more detailed look at that in three weeks’ time, following the November 21 release of the important October public borrowing figures.

In the meantime, let me whet your appetite. The chancellor will be under pressure on December 5 to boost government spending to accelerate growth, even after the welcome 1% bounce in gross domestic product in the third quarter.

Lying behind such calls are, I think, two pieces of conventional wisdom. The first is that public sector workers are being squeezed as never before, their pay frozen indefinitely even as inflation has stayed stubbornly above the official 2% target.

The second is that the economy’s struggle to grow has been made that much more difficult by cuts in government spending. The other components of output - manufacturing, energy, private services, construction - are having to work that much harder because government is getting smaller.

Today I can tell you that neither of those things are true. Let me start with public sector pay. I was alerted to this a few weeks ago by a report by Brian Reading for Lombard Street Research, described here. He suggested that public sector pay had risen by 9% over the past three years.

The response to this from readers, particularly those working in the public sector, was sceptical, so I checked the figures. Taking April 2009 as the starting point, when avarage weekly earnings in the public and private sectors were similar, I looked at the rise since then.

Sure enough, average weekly earnings in the public sector have gone up from £448 then to £491 now, a rise of 9.6%. In the private sector, in contrast, the increase has been from £446 to £469, 5.2%.

Public sector pay has risen nearly twice as fast as in the private sector in this supposed time of austerity. How can that be? One possibility is that the inclusion of RBS and Lloyds Bank employees in the public sector headcount, which happened in July 2009, bumped up the numbers. There is no evidence of that, however; no sudden jump in public sector earnings.

There are, instead, other explanations. The supposed squeeze on public sector pay provides a partial exemption for low-paid workers. In addition, public sector managers, including those in the civil service, appear to have been using other devices, including promotions withing salary bands, to deliver significant rises for their employees.

I would not pretend there has been no austerity affecting public sector workers. Public sector employment has dropped by 648,000 since the second quarter of 2009, or around 450,000 excluding the transfer of further education and sixth form colleges from the public to the private sector.

That in itself tells us something important. The strong growth in private sector employment in the past three years, more than 1m net new jobs, has a lot to do with wage flexibility. The suspicion must be that lack of pay flexibility in the public sector - and the big increase in the wage bill - has been a prime reason for the big public sector job losses.

That in turn raises the question of the role of the unions. In the public sector, 56.5% of workers belong to a union, compared with just 14.1% in the private sector. Have the unions looked after the pay of their public sector members, only to sacrifice hundreds of thousands of workers? They may well have done.

What about the second strong belief, about the effect of the cuts on growth? Those third quarter GDP figures were interesting in a number of respects but not least because they showed that 0.4 percentage points of the 1% rise in GDP was contributed by “government and other servicea”.

This component of GDP, all but a tiny bit of which is accounted for by public services, does not include benefit and pension payments, so its rise does not reflect the level of unemployment. It accounts for just over 23% of GDP. It is still rising.

Its third quarter jump was not an isolated event. Government has made a contribution to GDP growth for the past seven quarters. In the latest 12 months, while GDP has been flat, government output is up by 2.4%.

As noted here before, the “wrong kind of cuts” mean the government has been reducing capital spending. Those reductions have to be set agsinst the continued rise in government current spending. Even so, these figures show it is hard to claim that the economy is being dragged down by government.

The public spending enthusiasts will argue that you can never have enough. I would argue that we need to think a lot more about the mix of that spending and what we need, to return to Heseltine, to help medium and long-run growth. Osborne has been criticised for cutting spending too much. A more telling criticism is that he has not controlled it properly or sensibly.

PS Stranger things have happened than Andy Haldane, the Bank of England’s executive director for financial stability, turning up at a meeting of Occupy, telling it it was right, and crediting it with driving reform of the financial system. I can’t, however, think of many.

Banking reform was in train long before Occupy popped up. As for the 99% versus the 1%, it merely perpetuates the myth that if only the very rich could be brought to heel, the world’s problems would be solved and everybody would be happy.

The complexity of the issue was captured rather more successfully in the final report of the Commission on Living Standards, which met under the auspices of the Resolution Foundation. We have got used to the squeeze on living standards since the financial crisis.

The report pointed out that for those in the bottom half of the income distribution, that squeeze started well before the crisis; in the latter stages of the Blair-Brown upswing.

The reasons are many and varied. They include low education standards and workforce skills, a backfiring minimum wage - many employers regarding it as a norm, not a minimum - and an employment-unfriendly benefits and childcare system. Too many are trapped on low incomes.

Can anything be done? The Commission has a range of proposals in all these areas. Skills, benefit reform and a living wage all come into it. But the forces that are squeezing those on lower incomes have been building for decades. Turning them around could take as long.