Budget preview: abolishing national public sector pay rates is right

by Rob Marchant

As part of the Budget run-up, on Friday Britain’s labour movement was convulsed at the thought of the latest Osborne proposal: that national public sector pay rates might be scrapped.

But, before we join the voices of the major trade unions and the TUC who are, understandably, trying to look out for their own interest group, as a party whose interests are not always identical to those of our union colleagues, it might behove us to take a few minutes to take a step back.

Now, while no-one would suggest we should be adopting the Tory Budget wholesale, smart opposition is about determining which bits to oppose. A regional bargaining system would likely increase some pay-rates, as well as decreasing (or failing to increase) others.

And it is surely difficult to argue that the current, entirely inflexible system of fixed national pay rates, which was put in place decades ago in a corporatist state era, is fit for purpose.

First, as the Treasury points out, there are absurd variations depending on where you live. In some places pay rates can be artificially up to 18% higher than their private sector equivalents. And furthermore, applying the only current regional exception to the national system, the addition of London weighting, the system even then visibly fails to attract, for example, enough teachers to schools in inner London because many cannot afford to live there. So some people are still not paid enough. Result: poor levels of public service.
Second, the obvious corollary is that, at the same time, others are overpaid for where they live. As the government points out, the overpayment of public sector staff discourages the private sector from starting up in some areas, meaning that some parts of the country become “public sector ghettoes” where the private sector is squeezed out because it doesn’t want to employ staff at an above-market wage. Result: private sector under-investment.

Ironic, really, because PCS’ Respect-supporting general secretary, Mark Serwotka – displaying, sadly, a crushing lack of economic understanding – claims that localising pay rates would “institutionalise poverty“. In fact, it is precisely this kind of distortion which can cause a market failure, leading to a lack of jobs altogether. And there’s little that institutionalises poverty more than that.

So, in short, some people get overpaid for where they live and some people get underpaid. The fixed national rate distorts the pay rate away from the “fair” cost of living in a region. Pretty obvious stuff really, in that unless the cost of living were uniform across the country – which it is not – this is always going to happen.

The obvious question: is it not, then, sensible, to vary pay rates across regions, as they do in many other countries with not quite as centralised a tradition as ours? Will the sky really fall in, Chicken Licken? Why exactly should public sector workers be paid the same in the south east and the north west?

There is a third, more difficult-to-accept argument, and it’s this: if this is the right course of action, why did Labour not do it in thirteen years of government? Gulp. Looks like we might have to come clean on this one.

It is truly difficult to believe that no senior Labour figure had ever contemplated this in thirteen years, because it’s common sense. But here we get to the world of realpolitik and the British parliamentary system, which has only limited state funding and relies on funding from outside sources.

We, as Labourites, do not seriously expect the Tories to reform the banks, because…well, it’s obvious, isn’t it? Their funding comes from a number of city sources. True enough. However, the thinking that Labour might just be guilty of influence away from a course of action because of its union funding base is somehow anathema to us. That’s the kind of thing only the wicked Tories do.

Only it’s not true, is it?

So, I put it to you, m´lud, that senior Labour figures might well have contemplated scrapping national pay rates, momentarily. And, on doing so, would have almost as quickly shelved it, because of the political impossibility of selling it at party conference. But that doesn’t mean it’s wrong.

So far, Miliband has been silent on the subject, and Balls has said it would spark “anarchy” in pay rates (although Labour already introduced it in the courts service). Neither, at least, seems to have said it is unfair.

But to come out unthinkingly on the union side is to perpetuate a system which is obviously anachronistic. More to the point, it makes a mockery of our “fairness in tough times” agenda, because the current system patently is not.

Finally, such a position boxes us into looking after our friends in the public sector, deserving though they might be, against the rest of the country, who can go hang. Again. And an awful lot of the rest of the country is non-unionised and works in the private sector. What about those people?

In short, George Osborne has come up with a rather reasonable suggestion and, at the same time, he is inviting us to walk into his trap and oppose it.

Please, Eds, think.

Rob Marchant is an activist and former Labour Party manager who blogs at The Centre Left

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22 Responses to “Budget preview: abolishing national public sector pay rates is right”

  1. Ian Hunter says:

    This would make sense if pay went up substantially in more expensive areas. But it won’t. Instead pay in poorer areas will simply be frozen till it drops sufficiently. Result: more people on lower wages, less money to spend in poorer areas, and yet another weakening of the public sector.

  2. swatantra says:

    Its the wrong move, and we should oppose it. Even teachers get an inner/outer London allowance to make up the difference. Many police officers prefer to live in the more wholesome areas of Essex rather than having to put up with the filth and squalor and crimeridden streets of London. That is where perhaps we could differ ie You only get the allowance if you actually live in that area; after all what are allowances for but to mitigate possible financial losses.
    Chuka gave a brilliant interview this morning. At last we have a Biz Sec (Shad) who actually knows what he is talking about, following in the illustrious steps of Mandy, instead of the ideological prat we normally come up with.
    If Chuka doesn’t make Chancellor(Shad) in Ed’s next Reshuffle then I’m a banana.

  3. Don Gately says:

    “senior Labour figures might well have contemplated scrapping national pay rates, momentarily. And, on doing so, would have almost as quickly shelved it, because of the political impossibility of selling it at party conference. But that doesn’t mean it’s wrong.”

    momentarily? it actually was considered more seriously than that and to a lesser degree they did something about it

    from my recollection Brown was really keen on localising pay bargaining in the first term but clearly, as you suggest, could not push this through an unwilling party

    the move to increase the use of outsourcing through commissioning services from the voluntary and private sectors was a response to this. Rather than reform pay bargaining bypass it completely and have pay negotiations effectively take place through a tendering process with a wider range of providers. This does get dubbed “privatisation” by some on the left but it clearly isn’t as the state remains in control of service standards through the commissioning process – marketisation would be a better term – incidentally this is how the NHS is being reformed.

    The (then) labour controlled LGA were behind this completely and originally had a target to commission out 50% of council services by (this is where my memory gets fuzzy) about 2010.

    Commissioning didn’t increase at this pace, often because it was a bit more complicated and created bureaucracy through a client/contractor split but the intention was there.

    This policy isn’t going to be that effective with many services outsourced already and the cuts potentially driving councils and public bodies further down this route

  4. PMofGuiseley says:

    Sorry Rob, but I think you’re mssing quite a few important points here. If you believe, as I do, that the state has a role in trying to make the economy balanced not just in terms of deficit and profit, but also geographically, then you will understand why government needs to both ensure cenral govt funtions are shared throughout the country, and that the investment in government workers (which is largely recirculated in local economies) is also shared around the country. When Vince Cable suggested that local pay deals will allow local managers to manage locally, I don’t for one moment think that will mean upping pay in expensive areas more than currently happens. Certainly it hasn’t in govt depts like DWP in the past, where managemnt have always fought against doing so even when they could have.
    Far more importantly in this debate (and where the figures the govt use fail) is the hyperlocality of prices and costs in different areas. Just as London has some of the UK’s poorest areas, Yorkshire has some incredibly costly places mere miles from poor ones. Is your local pay to be based on where you live or work?
    There are already preoposterously many sets of pay negotiations for public sector workers – which might be good for people in HR – but do little for atually helping give the tax payer a fair deal for their ££s or make t easier for the vast majority of public sector workers who don’t actually have a choice about where they work or who for.

  5. So, to be clear, a teacher who chooses to work at a school in a deprived area should earn less than one who chooses to work in a wealthy area?

    Out of interest, what glorious and infallible government department should be entrusted with working out the cost of living variables across England’s arbitrary and porous regions?

    London is special on all sorts of measures, and is treated as such. Beyond that, it may well be the case that the South East has marginally worse services owing to attractive private sector oportunites. The obvious and necessary flip-side of this is that the North, Wales and Scotland have slightly better ones. So any minor loss of efficiency falls on the richest part of the country, where people are most capable of helping themselves, and subsidises the rest of the country, which macro-economic policy deliberately disadvantages. Seems fair to me.

    The little jibe at Serwotka just seems childish.

  6. David Ward says:

    The rights and wrongs are a red herring, because regional pay bargaining is totally impractical. We already know this because organisations like Foundation Hospitals and other quasi-autonomous public agencies already have the power to set pay rates in line with their local economies.

    They don’t do this because the potential gains are probably not worth potential costs involved in going through lengthy calculations of pay rates for various roles, and bargaining with unions and individuals, when they can simply pay in line with national guidance. Not to mention compliance with equality legislation and the potential for legal cases and costs.

    If the govt is still serious about moving civil servants out into “the regions” then why would any current staff consider donig so for all the hassle of moving home with reduced pay.

    Along with roads it is all part of the big budget distraction.

    Move along – there’s nothing to see.

  7. Don Gately says:

    “If the govt is still serious about moving civil servants out into “the regions” then why would any current staff consider donig so for all the hassle of moving home with reduced pay. ”

    why assume the civil servants themselves have a choice?

    from a strategic perspective, lower rates of regional pay make outsourcing more attractive for the senior civil servants in whitehall who wouldn’t have to make a move – they get to cut their budgets but keep their empires intact. If the more junior civil servants, who are likely to be relocated like this, don’t want to make that move then they’re making themselves redundant. Overall this would make any attempt to move to the regions more likely to save money.

    this really has the potential to make the regions much more attractive to relocation

  8. Rob Marchant says:

    @Ian: No, pay rises until you get enough people to fill the jobs. And unions negotiate the rates. If the area is poorer, then you already have an advantage over public servants in other areas which are not, because the cost of living is lower and therefore your disposable income is *higher*.

    @Swatantra: you actually make my point for me, that the current London weightings do not solve the problem.

    @Don: very interesting, my guess was pretty much correct, then. It’s true that outsourcing rather precludes this, but many councils only outsource because it’s the only way they can get flexibility and value for money. This would actually mitigate against that and make it more atttractive to keep services in house, where this was desirable.

    @PM: “If you believe, as I do, that the state has a role in trying to make the economy balanced not just in terms of deficit and profit, but also geographically” – now I was with you up till that point, but then you contradict yourself entirely. What you should be aiming for is is a relatively flat profile of *disposable* income (i.e. income less costs) and not income itself. Otherwise you really are being geographically unbalanced. Neither do you answer why practically every other country already does it regionally, apart from us.

    @Samuel: Er, yes. Next.

    @David: no it’s not, and they do it in most other countries.

    @Don: precisely.

  9. paul barker says:

    A thoughtful piece, whats it doing on a labour site ?

  10. Alan Williams says:

    There was a thread about this on Lib Dem Voice a few days, with a lot of very strong arguments against abolition in the comments: http://www.libdemvoice.org/national-pay-rates-27660.html#comments

  11. Mike Homfray says:

    The consequences of moving to a localised system will be the further confirmation of some areas being those where there is a shortage of cash. Private firms will suffer too as there will not be the money around to spend – and at the same time the already overheated south east will continue to overheat.

    Labour must oppose this mistaken suggestion

  12. Jim says:

    How about regional pay for MPs – say twice the median salary for a working age adult in the constituency?

    Some of the champagne socialists parachuted into safe Labour seats might think twice, no?

  13. Rob Marchant says:

    @Mike: let’s go round this one again. Artificially increasing salaries above market rates leads to a gap between demand and supply of labour, causing unemployment. Employment at a slightly lower rate of pay is infinitely preferable to unemployment. Which part did you not understand?

    @Jim, yes that makes total sense. Impose regional pay on people who spend most of their lives at Westminster.

  14. Alan Williams says:

    @Rob, are you saying that the current gap between public and private sector pay would be even bigger if public sector wasn’t so high? Or are you saying that the best workers are all in the public sector and because the private sector can’t compete with public sector pay rates it doesn’t bother employing anyone at all?

    If it’s the latter, then you’re hoping that cutting public sector pay will force the best workers to seek jobs in the private sector, new jobs that will be created rather than existing jobs (so nobody would be put out of work). Meanwhile, jobs in the public sector would be freed-up to go to less qualified workers who are currently unemployed. So, if we cut teacher salaries then graduates who are currently going into teaching will go for jobs in the private sector instead, and teaching positions will be freed-up for non-graduates?

  15. Amber Star says:

    Pay based on ‘need’ & levelling residual ‘disposable’ income. WTF?! So now working in the public sector is like welfare & pay should be based on need? What about Equal Pay for Work of Equal Value, Rob? I’m not interested in a Mr Clever response, I want you to really think about it. Because if Labour are going to treat public sector work as being the same as welfare then there’s no hope for us as a Party!

  16. Stephen G. says:

    Imagine it, you’re on the doorstep in the run-up to an election: “We know the millionaires have had their budget bonus, domestic demand has been stripped from the economy and led to mass unemployment and the child poverty target has been scrapped, so now, in the interests of fairness in tough times and to help the private sector, we’re hoping you’ll vote Labour because we’re promising you, as a public sector employee, a wage cut of up to 18%.”

    The BBC will have to include an “Oblivion for Labour” setting on their swing-o-meter.

  17. Rob Marchant says:

    @AmberStar: oh, that’s a good argument. If you disagree with something, say it’s a “Mr Clever” argument and that’ll win the debate…ok Equal Pay for work of Equal Value makes no sense if your living costs in area A are double your living costs in area B. That is why we struggle to find teachers and nurses in inner London, by clinging to that arcane principle.

    @Stephen G: I wouldn’t worry about it, this will probably be ancient history by then. There will be no wage cut.

    Let’s put it another way: no, public servants of mid-Wales. We will not artificially inflate your wages by 18% any more. Sounds different, doesn’t it?

  18. Alan Williams says:

    @Rob: Keeping your fingers crossed that Osborne will simply drop this as a bad idea and it will become “ancient history” doesn’t seem like a good plan. I agree that the discussion here and elsewhere has shown there are no strong arguments in favour of abolishing the national public sector pay rates, but I still think Osborne is going to push forward with the idea.

  19. John Ruddy says:

    Please tell me which large private sector company currently, or has plans to, operate different rates of pay across the country.

    You will find that not a single one does.

  20. T Dan Smith's Ghost says:

    I suspect the author of this laughable piece read “Economics for Dummies” yesterday afternoon and now thinks he’s qualified to tell us plebs in the North we should be paid less because the god of the free market demands it. Surely a vote winner for the Party.

    “As the government points out, the overpayment of public sector staff discourages the private sector from starting up in some areas, meaning that some parts of the country become “public sector ghettoes” where the private sector is squeezed out”

    What empirical evidence do you or your beloved Gideon have that this is what is happening? Have you considered other explanations? Perhaps the insane amounts of infrastructure funding lathered on the parasites in London is a more likely reason?

    “Private firms will suffer too as there will not be the money around to spend – and at the same time the already overheated south east will continue to overheat.”

    This is in fact a perfectly reasonable point, just because Blairite relics like yourself couldn’t care less about developing regional economies means nothing.

    Let’s make sure this article is remembered when Rob Marchant tries to get selected for some poor northern constituency he’s never visited before.

  21. Rob Marchant says:

    @TDan: I’m from the North, dummy. And, for your information, I have a Masters in Economics. Your qualifications are…?

  22. James Hands says:

    You may have a master in economics but you fail to understand any of the objections commenters have raised to your ill thought out policy. The following demolishing of your evidence free arguements comes from a comment on the lib-dam voice.

    (Disclaimer: I’m a labour market specialist. I am also pseudonymous)

    Wolf’s report lacks an evidence basis in many key areas, and fails to convince.


    Inconveniently for the core thesis of the argument, the Government is essentially in the process of testing ‘crowding out’ theory in the regions by significant layoffs of skilled public sector staff. There is no evidence that this is stimulating any kind of private sector jobs recovery at this stage and currently, crowing out theory appears to be in the process of being falsified.

    A lot of this is because the skills mix is not the same as those required by the private sector. The public sector workforce is more highly qualified, with far more graduates – and is dominated by certain specialist professional occupations in health, education and social care. yes, there are a lot of other employees outside these areas but they’re the ones who have suffered most in cuts so far. By reducing relative pay rates of public sector professionals, you do little to boost the private sector. There are few potential businesses in Teesside prevented from expansion because they can’t recruit social workers. In short, Professor Wolf’s highlighted quote:

    “Nationally set public sector salaries, just as much as the national (and also uniform) minimum wage, put a floor under the wages a private employer can offer – and correspondingly reduce the degree to which setting up business in a deprived area rather than a prosperous one is financially attractive.”

    is faulty because it fails to identify just what skills this makes private employers less able to access. There may be some overlap in some areas (HR and accounting, possibly), but unless you can demonstrate that there are specific skills currently effectively witheld from the private sector because of public sector hoarding in the regions, then you lack a case to make.

    There are manifold issues with this policy; lack of Plan B if (when) it turns out you were wrong; the effect on local service SMEs of suddenly decreased local purchasing power; the inability of this policy idea to adequately account for national cost invariances (are you going to cut local fuel duty? Local tax rates?); the message that it sends that people working in Poorchester (and bear in mind one of the areas most affected will be Lib Dem heartlands in the SW. Not just Labour voters) are literally worth less than those working in Richville; the knotty problem of what happens if constituency or local authority boundaries change; the very simple and basic point that a worker in, eg, Hull, might live in Hull and work in Hull, but they’re also actually allowed to travel elsewhere, perhaps for business or even, heaven forbid, for pleasure, and reducing their income based on local costs simply makes them less able to, for example, travel to London.

    At a very basic level, you don’t even tackle the questions of where the necessary data is going to come from (and the simple fact you haven’t makes me suspect you don’t know how tricky this will be to do properly), how it will be examined (will it take into account local distortion effects by one large employer in a specific sector, or will it be a blunt instrument average? What would happen to a place like Sandwich when the main employer suddenly shuts and precipitously drops the local average wage – does everyone else then have to have a pay cut because a private business went under?), how often it will be examined, and what would the appetite really be for local pay *rises* if they turned out to be necessary. Wages can be driven up as well.

    The failure to confront many of these points outlines the lack of rigour in the argument you’re making. But here’s a political point to chew on, Stephen.

    As I mentioned, the public sector is much more graduate than the private sector, and in much of the UK is the main employer of university graduates. What you’re enthusiastically championing here is effectively an ongoing pay cut for a significant proportion of future graduates. This doesn’t look like it works very well with your tuition fees policy, at all, because it will reduce future revenue (and the funding of the policy is already very precarious), and will provide a disincentive for graduates forced to repay according to earnings to accept lower salaries, thus exacerbating an already serious issue of talent flight from areas that really need it. I would suggest that the Liberal Democrats are probably not well-advised to champion a policy that disproportionately disadvantages future graduates.

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