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The Progressive Policy Think Tank

Govt should commit to supporting a new ‘double lock’ for public sector pay

Lifting pay with inflation costs £5.8 billion by 2019/20, but this falls to £3.3 billion after higher tax receipts and lower welfare payments are taken into account

Government should scrap the public sector pay cap and introduce a ‘double lock’ to ease the pressure on public servants and public services according to a new report published today by IPPR, the progressive policy think tank. Under the double lock, Government should guarantee funds for public sector pay to rise by either inflation (CPI) or private sector earnings whichever is highest

Ahead of the Autumn Budget, new IPPR analysis shows that a significant portion of funding required to lift the public sector pay cap is returned to the Treasury almost immediately in the form of higher tax receipts and lower welfare payments.

The headline cost of increasing public sector pay in line with CPI over the next two years would be £5.8 billion by 2019/20, compared with keeping the cap in place. However, this drops to £3.55 billion once the higher receipts from Income Tax and National Insurance, and lower welfare payments from means tested benefits resulting from the pay rise are taken into account.  A public sector pay rise would also lead to higher spending in the economy which would grow GDP by  £800m in 2019/20, of which £250 million would be additional taxes. This means the final cost to government of lifting the public sector pay cap would be £3.3 billion by 2019/20. 

A catch-up rate of uprating pay by private sector earnings plus an additional 1 percentage point would have a headline cost £12.7 billion in 2019/20. But the final cost to government would be £7.2 billion and the economy would grow by an additional £1.75 billion.

Workers in the public sector have experienced a seven-year pay squeeze. A two-year pay cap was introduced by the then-Chancellor George Osborne in 2011/12. He argued that while public sector workers did not cause the recession ‘they must share the burden as we pay to clean it up’. The pay freeze was followed by five years of pay being effectively capped at 1%. This has significantly eroded the value of pay; a school teacher outside of London is now paid almost £3000 less in real terms today than in 2010/11, a police sergeant is paid more than £4000 less and a nurse is paid over £3000 less. The Government had planned to continue the cap for a further two years, up to and including 2019/20, and they have made no commitment to reverse the real terms cuts to pay seen over the period.

IPPR recommend that the double lock should remain in place until public sector earnings return to the levels of 2010/11. Thereafter, future increases in pay above inflation should be linked to improved quality of services for the public.

In addition to lifting the pay cap for all public servants, the report recommends that public sector employers and trade unions should consider targeting additional uplifts at lower-paid workers, such as a cash element to pay rises. Faster increases in pay should also be delivered through a public sector-wide commitment to the Living Wage.

The report also shows that despite the Chancellor reportedly describing public servants as ‘overpaid’, as a result of the long pay squeeze, public sector workers are now paid less than comparable workers in the private sector.

The IPPR analysis makes clear that any increase in pay must be funded, so that pay rises do not come at the cost of job losses and service cuts. IPPR therefore recommends that these funds are raised through additional taxation, announced at the Autumn Budget, on the highest income households in society. This would ensure that the policy move is progressive, while also maximising the benefits to GDP growth: as in effect money will be moved from those most likely to save to those more likely to boost consumption in the economy.

Alfie Stirling, IPPR Senior Economic Analyst, said:

“The UK needs a pay rise across the entire economy. Government has an important role to play in the private sector by helping firms to lift productivity and earnings through industrial strategy, but it is vital that the public sector does not get left behind.

“The costs of raising pay for public service workers are not trivial, but their contribution to the rest of the economy is invaluable. Public goods, such as health, education and law and order, are the foundations upon which successful private commerce is built.”

Joe Dromey, IPPR Senior Research Fellow:

“The public sector pay cap cannot continue. The ‘double lock’ for public sector pay would ensure that no public servant would see their pay fall further behind inflation or the private sector.

“But this must be funded, otherwise the pay rise public sector workers deserve would come at the cost of the public services they deliver. The Chancellor must use his Autumn Budget to set out how he will fund a real pay rise for public servants.”

Contact

Sofie Jenkinson, 07981023031, s.jenkinson@ippr.org

Notes

The new IPPR report Uncapped potential will be available at https://www.ippr.org/research/publications/lifting-the-cap  from 00.01 Wednesday 15th November. Advanced embargoed copies are available from the press office.

This report uses the Consumer Prices Index (CPI) for inflation from the ONS, and forecasts for CPI from the OBR, to measure all ‘real terms’ effects across time. Other inflation metrics are available, such as CPIH – which includes housing costs – and RPI which uses a different methodology to calculate the average rate of price change across consumer items. While the direction of trend in real pay is similar for all metrics of inflation for the period in question, our findings will not be exactly the same as those estimated using alternative inflation indices.

IPPR aims to influence policy in the present and reinvent progressive politics in the future, and is dedicated to the better country that Britain can be through progressive policy and politics. With nearly 60 staff across four offices throughout the UK, IPPR is Britain’s only national think tank with a truly national presence. Our independent research covers the economy, work, skills, transport, democracy, the environment, education, energy, migration and healthcare among many other areas.

www.ippr.org

Table 4.1

Annual fiscal effects of lifting the pay cap, relative to keeping the cap in place, £ million, 2019/20

CPI

Private sector
   plus one percentage point

Change in total pay bill

5,800

12,700

   of which

   Employer pension contributions

850

1,900

   Tax receipts generated

2,100

4,600

      of which

      Income tax

1,100

2,450

      Employee NICs

400

850

      Employer NICs

600

1,300

      Net pay

2,850

6,200

Savings from means-tested benefits

150

350

Change in net income

2,700

5,850

Immediate net cost

3,550

7,750

Source: Authors’ analysis using the IPPR tax-benefit model based on data from the Family Resources Survey 2015/16, OBR 2017a, OBR 2017b, ONS 2017a, ONS 2017b and Cribb 2017.

Note: Counterfactual scenarios assume that the cap is lifted from 2018/19 onwards and pay scales are uprated by either CPI or private sector earnings plus one per cent (respectively) for two years to 2019/20. All affects are compared with a baseline scenario where public sector pay goes up with the OBR’s forecasts for 2018/19 and 2019/20. Columns may not sum due to rounding.

Table 6.1

Annual effect on GDP and final fiscal cost, £ million, 2019/20

         CPI

        Private sector plus one percentage point

Change in net income

     2,700

     5,850

Additional GDP

800

1750

   of which

   Consumption and labour taxes

250

550

   Non-tax components of GDP

550

1200

Final cost to Government

3300

7200


Source: ‘Change in take home pay’ taken from Table 5.1. Additional GDP estimated using the OBR 2015 multiplier for Income Tax (see Reed 2014). Additional receipts from consumption taxes were estimated by applying an estimate for the marginal propensity for additional consumption following a positive income shock (Bunn et al 2017) and an estimate for the value of consumption taxes in additional consumer spending (Reed 2014). Additional receipts from increased labour in the economy are estimated using ONS 2017c and OBR 2017a projections for the share of labour costs in GDP and an estimate for the proportion of wages recouped in taxes (Reed 2014). The final cost to Government is estimated by subtracting additional tax receipts from the immediate net cost in Table 4.1.

Note: Counterfactual scenarios assume that the cap is lifted from 2018/19 onwards and pay scales are uprated by either CPI or private sector earnings plus one percentage point (respectively) for two years up to 2019/20. All affects are compared with a baseline scenario where public sector pay goes up with the OBR’s (2017a) forecasts for 2018/19 and 2019/20. Columns may not sum due to rounding.