The chancellor's announcement of a tough 1% pay freeze for the public sector has come as a shock. Less so, the news that regional pay is back on the agenda
In an extraordinary development, the two-year pay freeze in the public sector is to be extended for a further two years, with basic pay awards restricted to an average of 1 per cent in each year. The Chancellor’s announcement in the Autumn Statement came as a major surprise as most employers and unions across the public sector had assumed that there would be a return to some semblance of normal pay bargaining following the two-year pay freeze.
Indeed, in making his statement, the Chancellor let slip that many government departments had already made provision for pay rises of 2 per cent in the next two years. However, he had decided to cut that back to 1 per cent saying, ‘We will set public sector pay awards at an average of 1 per cent for each of the two years after the pay freeze ends.’
He acknowledged that for some workforces, mainly in the civil service, the two-year pay freeze will be coming to an end in the spring of 2012, but for most groups, including the NHS and schools, the end will be in 2013. Thus the unilateral incomes policy for the public sector imposed by the government will be extended to 2015.
It remains to be seen how much inflation will rise over the next two years. Already under the pay freeze period we have had two years of inflation at 5 per cent, eroding the real value of earnings by a considerable extent. Offsetting this erosion, those earning below £21,000 received pay rises of £250, except in local government where front-loaded cuts ensured councils deemed this unaffordable, and by progression payments where this was contractual or seen as an essential part of the pay system, as in the NHS.
There is some ambiguity in the Chancellor’s statement about payments for progression in the next two years. One interpretation is that progression payments will continue where appropriate, thus offsetting the ‘toughness’ of the limit of 1 per cent. It was the Chancellor himself who said: ‘I accept that a 1 per cent average rise is tough’. A second interpretation is that progression payments would come within an overall paybill cap of 1 per cent. But this would seen as especially punitive, even in a period of austerity.
Osborne also raised the perennial issue of regional pay, as Chancellors tend to do roughly every seven years or so. He announced that: ‘We are asking the independent Pay Review Bodies to consider how public sector pay can be made more responsive to local labour markets – and we will ask them to report back by July next year.’
Margaret Thatcher tried this, as did John Major. Local pay bargaining in the NHS was attempted in the mid-1990s and was deemed by all concerned to be a complete failure. Gordon Brown, while Chancellor, pushed the idea of regional and local pay and even tried to construct regional price indices to assist with this, but the project was shelved.
There is a mistaken belief in the Treasury that all private sector companies set pay with reference to local labour markets. The truth is that large companies that operate on a multi-site basis, and are therefore a proxy for public sector organisations, operate with national structures, albeit with a limited number of London and South East allowances or zones, not that dissimilar to existing flexibilities in public sector pay arrangements. In the private sector pay tends to be set by skill level, not geography.
Alastair Hatchett is head of pay and HR at Incomes Data Services. This post first appeared on the IDS blog
