Thanks, but no thanks, by Ann Rossiter

29 Jun 06
The government has poured money into public sector pay, but taxpayers can't see any service improvement, the unions are far from grateful and now the chancellor is pulling the plug. It's time to move to a system that targets deprived areas, argues Ann Rossiter

30 June 2006

The government has poured money into public sector pay, but taxpayers can't see any service improvement, the unions are far from grateful and now the chancellor is pulling the plug. It's time to move to a system that targets deprived areas, argues Ann Rossiter

Treasury ministers must be wondering where it all went wrong. The government has made a huge investment in public sector pay and conditions – larger than any in the past 30 years and way beyond the dreams of Trades Union Congress officials under the previous Conservative administration.

Yet this government is as unpopular with the unions and professional bodies as any has ever been. Public sector workers are now vehemently and openly hostile. The Cabinet must be asking itself how is it that although pay has been rising faster in the public than the private sector, Health Secretary Patricia Hewitt was heckled off stage by disgruntled nurses?

Is it, perhaps, because these unparalleled wage increases have gone hand in hand with demanding new productivity requirements? After all, the government keeps on saying reform must accompany investment.

Well, no. The adjustments to pay bands and the NHS Agenda for Change programme were pushed through without any accompanying requirements for increased productivity. In fact, in the case of the GP contract introduced two years ago, more pay is being given for less work.

The government is now in the unhappy position of being attacked from both sides. Not only are the unions up in arms, but the Conservative and Liberal Democrat opposition have criticised the wasteful approach of 'over-paying' public sector workers without linking this to improved performance.

Ministers must be sorely disappointed at the lack of thanks they have received from the public sector for this no-strings investment. But what can the reason be? Is it that the unions and professional bodies have become so entrapped in a defensive and oppositionalist mindset that they cannot recognise their own good fortune?

This might be part of the reason, but it seems more likely that this response is a reflection of their deep political opposition to the government's public service reform agenda – in particular, the market-based reforms in education and health care.

This might be a mistaken strategy for the unions. If they oppose and harangue the government whatever stance it takes on public sector pay, there is little incentive for the chancellor to invest in pay rather than capital or service improvements, particularly in a tight spending round. This seems to be borne out by Gordon Brown's recent statement on the need for a three-year pay freeze, reinforced by the call for pay constraint in his Mansion House speech last week. But is this pique on the part of the chancellor, or is it based on a more strategic analysis of the requirements of public services?

In fact, Brown is right to resist increased spending on pay. He should prioritise capital investment while reforming public sector pay structures. Of the significant increases in public spending (from 39% to 43% of gross domestic product), the majority has been absorbed by staff costs – including both wages and pensions, to the detriment of capital investment. For example, capital expenditure for the Department of Health totalled £4.9bn in 2005/06, but pensions alone cost the NHS almost double at £8.9bn that same year.

It is telling that recent increases in public spending have not had a commensurate effect on user satisfaction. Overall satisfaction with the NHS has dropped from 72% in 1998 to 62% in 2006. Also, while satisfaction with GPs remains extremely high at roughly 90%, this figure has remained static for decades, despite major pay rises for GPs two years ago. Clearly, increases in investment have not resulted in better quality services, at least in the eyes of the public.

The government needs to take a different approach altogether to public sector pay. Evidence suggests that dissatisfaction with services, including health care, is highest in deprived areas. This is understandable given the acknowledged fact that public services tend to be of worse quality in areas of greater deprivation.

In the medical field, this is known as the 'inverse care law' which states that 'the availability of good medical care tends to vary inversely with the need of the population served'. It holds true outside medicine as well: the poorest, most disadvantaged children are taught in the worst schools; social services struggle for capacity where they are needed most.

This is due in part to recruitment and retention difficulties in these areas. High staff turnover and overstretched and inexperienced staff can have a significant effect on the quality of services. As is widely acknowledged, patients in deprived areas tend to suffer more ill health and more intractable illnesses. And teachers working in areas of high deprivation tend to experience more challenging behaviour from children who might be unwilling or unable to learn or have wider social needs and therefore require more pastoral support. These factors will have negative ramifications for recruitment and retention; staff are often unwilling to work in such challenging circumstances or feel they are inadequately compensated for their work.

Indeed, there is strong evidence that local deprivation is a major cause in variation of job vacancy rates. For example, there are fewer applicants for GP vacancies in deprived areas and posts take longer to fill. A 1998 British Journal of General Practice survey – 'General practitioner turnover and migration in England 1990-94' – suggests that deprivation in the practice community is the single most important factor to a GP in choosing a job, and that the average GP would give up £4,222 of income to avoid serving deprived patients.

This is where public sector pay could lever huge improvements in public services. Currently, however, it is negotiated in a statutory national agreement and so fails to take these different working and living conditions into account. Moreover, it makes little or no allowance for differing costs of living, beyond the existence of London weighting.

Reforming public sector pay to take these variations into account, and thereby compensating those working in the most deprived and challenging areas, could reverse the 'inverse care law' and therefore reduce health and education inequalities. This would require greater flexibility, liberalisation and mechanisms that respond to labour shortages, whatever the reason for them.

One option is to introduce a zonal pay system in the public sector as part of national pay bargaining to deal with shortages of sufficiently qualified public sector workers in specific areas.

Under such a system, four to five pay spines would be negotiated nationally with progressively higher wages. If a particular hospital, school or other provider of a public service faced recruitment and retention problems, it would move up to the next pay spine. If a facility on a high pay spine were recruiting high-quality staff with ease it would move down again, with existing staff retaining their level of pay.

As zoning could be contained within a national pay structure, it would prove fair to staff who would see that local pay was not being used as a tool to dismantle national pay bargaining. It would also prevent inflation from creeping into the system. And, because it would operate at the level of the individual organisation, such as a school or hospital, it would be efficient and responsive to recruitment problems on a case-by-case basis.

A more flexible and liberalised pay system such as this, coupled with capital investment, would drive targeted performance improvements. Maybe then, the government's mantra of 'no investment without reform' will hold true.

Ann Rossiter is director of the Social Market Foundation. SMF's publication on public sector pay will be published shortly

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