To freeze or not to freeze pay, that was the question

5 Nov 09
Finance directors discussed the difficult issues facing them at Public Finance’s Scottish dinner debate, held on October 29. David Scott reports
Finance directors discussed the difficult issues facing them at Public Finance’s Scottish dinner debate, held on October 29. David Scott reports

5 November 2009

Finance directors in Scotland are divided on whether a pay freeze is inevitable as councils struggle with the impact of the economic downturn.

At a Public Finance debate at Falkirk on October 29, a narrow minority of the finance directors attending believed that a freeze was inevitable.

The CIPFA members had questioned a panel of four on various issues concerning the funding problems currently facing councils.

Apart from the controversial topics of pay and pensions, the panel discussed the ability of councils to continue the council tax freeze, the prospects for three-year budgeting plans in the present climate and whether the scale of cuts would be as large as predicted.

The panel members participating in the event, sponsored by Threadneedle, were John McLaren, a researcher at the Glasgow University-based Centre for Public Policy for Regions; David Watt, head of the Institute of Directors in Scotland; Professor Arthur Midwinter, a leading expert on public finance and an adviser to Labour in the Scottish Parliament; and Anthony Rush, a member of the public services group of the CBI business lobby. Brian Lawrie, chair of CIPFA’s finance directors section, chaired the debate.

Following a card vote on the pay freeze, nine finance directors voted ‘no’ to the question: is a pay freeze in Scottish local government inevitable? Seven voted ‘yes’.

Midwinter said he believed that in the current climate, when jobs were being lost in the private sector, there was a case for restraint on public sector pay. But there was also a case for sustaining demand in the economy, he said.

‘I think cost-of-living adjustments only for the next two or three years would be a reasonable compromise. I don’t think a pay freeze, while it would release money for councils to do things with, would be consistent with the economic strategy that is in place at least until the next election.’

Watt hoped a pay freeze would not be inevitable. Claiming it would be a major disincentive to progress, he said: ‘It’s not the best solution at all.  I would hate to see it and I’m strongly against it.’
Rush stressed that he did not support pay freezes ‘in any circumstances’. He felt it would ‘disincentify’ the workforce. ‘However, I think it’s probably inevitable because real politics will dictate it,’ he said.

McLaren thought a freeze probably would be inevitable but with the proviso it was done in an Irish-style way, via a national agreement so that people could understand why it was happening.  
The debate then turned to the Local Government Pension Scheme, which came under attack from the business representatives on the panel. Watt, after describing his own pension prospects, told the audience: ‘I would willingly swap with any of you, not necessarily your jobs, but certainly your pensions.’

He advised: ‘We have to face up to the unfunded public pensions scheme.  We must look at employees increasing their contributions to pension funds and have very simple, gradual measures like that.’

He believed the problem lay with MPs, MSPs and civil servants who had the best pensions in Britain.  As they refused to change their own pensions, it was difficult for them to change anybody else’s.  ‘That’s why there’s total inactivity on pensions,’ he added. ‘It’s not because it’s right or wrong or because they cost bucket-loads of money. It’s because it starts right at the heart of government and that’s the scandal that hasn’t yet come out.’

Lawrie defended local government pensions, stressing that employee contributions had increased significantly.  He said: ‘Most people in this room are currently paying at least 10% – or more nowadays – in terms of pensions.

‘It’s a funded scheme, although I think probably all of us recognise the struggle and increasing cost that it is putting in terms of council tax and service delivery. Ours is a lot more transparent as a scheme than the teachers’ scheme and others that are unfunded and met through national taxation.’

Another controversial area raised in the debate was the freeze on council tax. The Scottish Government recently announced its commitment to funding the freeze for the third year in succession. This prompted Derek Yule, of Aberdeenshire Council, to ask whether the freeze should be lifted to give councils more ‘headroom’.

The panel members were united in their opposition to a freeze. They were also sceptical about the concordat agreement struck between council leaders and the Scottish Government.  

Rush said: ‘I’m very suspicious of freezes of any nature, whether it’s a council tax freeze or a pay freeze. I see them as gestures when more drastic action should be taken. It’s not a question of freezing or increasing tax. Councils should be reducing council tax at the present time and they should be reducing it substantially.’

Midwinter accused the Scottish National Party administration of ‘simply playing politics with property taxes’.

He said: ‘Why local authorities would voluntarily give up the single most important mechanism of their fiscal autonomy was always beyond me.’

Uncertainty about the scale of cuts that might be imposed on local government and the public sector generated some controversy. The Centre for Public Policy for Regions had warned that Scotland faced ‘deep and prolonged’ real-terms spending cuts of at least 8.5% in its latest report, commissioned by CIPFA and the Society of Local Authority Chief Executives and Senior Managers. Lawrie responded that a more realistic assumption was even bigger cuts of around 10%–12% over the period to March 2014.

Midwinter strongly disagreed with these forecasts, saying he saw ‘no evidence to believe either figure’. He said he would be ‘astonished’ if the Labour government would bring in any Pre-Budget Report containing savings on the scale predicted.

McLaren, one of the authors of the CPPR report, agreed there were caveats regarding the figures but he pointed out that they were based on Treasury projections.

Listing various bodies that also predicted negative figures, he warned:  ‘In the first seven or eight years of devolution we had an average 6% real-terms increase – we’re now going to get a real-terms decline over the next four years… it will be a huge psychological and physical change.’

McLaren and other contributors emphasised the need to plan ahead and prepare for cuts. A number of finance directors clearly believe flexibility is needed to allow marginal increases in council tax so that the money raised could be re-invested in the local economy.

Rush called for a ‘fundamental review of how you do your business’. Watt, stressing the need to look at the ‘big picture’, emphasised the need to slim down the public sector.

He questioned why Scotland, a country with a population of around 5 million – equivalent to a large Chinese or US city – needed to have 32 local authorities, 14 higher education establishments and 43 colleges of education as well as various health boards and police authorities.

And did Scotland need 32 directors of finance? ‘I think it’s just nuts… It’s absolutely fundamentally wrong,’ he told his audience. n

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