Public sector pay: Scrap the cap?

Blog posts

5 Jul 2017

Duncan Brown

Dr Duncan Brown, Head of HR Consultancy

What should a doctor or a dentist or a nurse earn? Or a sergeant in the army, who risks getting shot at or blown up? Or the bloke who diligently sweeps the street outside my flat every week?

The whole issue of public sector pay and the methods and processes for answering these questions has been thrown into the spotlight in recent days. The Labour Party's amendment to the Queen's speech last Wednesday called for an end to the one per cent cap on public sector pay increases, which was introduced after two years of post-crash pay freezes by then-Chancellor George Osborne in 2012, and is due to continue throughout the next Parliament. The amendment was rejected by 323 votes to 309, through Teresa May's government's controversial coalition with the DUP. But within hours of the vote defence secretary Michael Fallon, when asked about higher awards, responded that: 'This is something we have to consider, not just for the army, but right across the public sector as a whole'.

And environment secretary Michael Gove appeared to join other ministers, including reportedly the health secretary, days later in supporting the opening up of the limit, commenting that: 'The pay review bodies (PRBs) have been set up to ensure that we can have authoritative advice on what is required to ensure that the public services are effectively staffed, and that people within them are effectively supported'. That hasn't always been the case in the past, with recommendations over-ruled, or increases phased in to save cost.

IES has been working recently on a number of projects to assist these bodies in reviewing the pay comparability methods that they use to help them to recommend appropriate rates of pay, a really difficult and important task.

The top surgeons would certainly be at the top of my utopian pay hierarchy, well above Premiership stars and FTSE 100 executives. Office of National Statistics figures do show them to be in the top earning occupational groups, alongside pilots, chief executives, police chiefs and IT and marketing directors. I suspect most of the public would agree that this is how things should be, and when the body that sets MPs' pay carried out a survey of public opinion, 60 per cent felt that MPs should earn less than GPs.

There are of course many thousands of different jobs across the public sector, at all levels of pay and skill, but the one per cent cap has been a universal policy applied to just about all of them. Government pay policy for the last decade has focused on the 'three Fs', driven by the principles of: fair market rates, so as to recruit and retain; flexibility, to reward performance and differentiate; and funding/affordability. But when the government employs almost all of the firefighters, nurses and police officers in the country, how do you determine a market rate? As my colleague Steve Bevan's research shows, performance-related pay has had a troubled history across the public sector. We have generally seen moves away from performance-based increases and bonuses in recent years, with the PRBs generally rejecting government requests to be more flexible and differentiate in how the one per cent increase is allocated.

Perhaps not surprisingly then, the funding objective has tended to dominate. With some 70 per cent of the total costs of the NHS being the staff, and each extra one per cent increase in the government's paybill adding between £3 - £4 billion to public spending, the Prime Minister seems set to continue with the cap, despite firing the chancellor who introduced it. At least for the moment. The Police Federation of England and Wales's evidence submitted to the Police Remuneration Review Body late last year reported that: 'Unfortunately, due to Treasury direction the PRRB stayed within the one per cent pay cap, rather than accepting the PFEW's suggested 2.8 per cent pay rise'.

Of course the issue is an emotive one, with Labour MPs at prime minister's questions last Wednesday wearing badges from the Royal College of Nursing with the slogan: 'Scrap the cap!' The amazing response of the emergency services to the recent spate of major incidents had, according to Liberal Democrat chief whip, Alistair Carmichael, helped to persuade his party to back Labour's amendment. 'The government must listen to the overwhelming tide of public opinion and give our police, firefighters and nurses a pay rise,' he said. The SNP also supported the amendment and later last week, their own devolved government removed the same limit on Scottish public sector workers, although how any extra spending on this will be funded was not set out.

The issue has also been brought to the fore however, by the clear evidence of declining living standards for the majority of public sector workers. When it was introduced, as Osborne pointed out at the time, the one per cent capped pay award was still above the rate of price inflation, which was actually negative, ie prices were falling. Now with price inflation in excess of three per cent it is most people's real earnings that are falling. And the phenomenon is not limited to the public sector, with average earnings as a whole only rising by 1.8 per cent in the latest monthly release from the ONS.

Research studies highlight that the last decade has probably been the worst for real pay growth for more than two centuries. Hence the one per cent pay limit has become a key component of the wider debate as to whether the whole austerity-driven, deficit-reducing policy of the government should be abandoned in favour of higher investment and spending to drive faster economic growth and rising living standards. IES supports the contention that a key factor explaining the UK's productivity deficit compared to our major international competitors is a relative lack of investment in people, their skills and their pay. As data from the OECD highlights, we have a comparatively high proportion of some 20 per cent of our workforce in low skilled, low paid work which tends also to be characterised by low productivity.

The debate is about more than living standards and GDP however. Chat with any of these public servants yourself and you will see that their anger is far wider than just being about the pounds and pence. They feel they are working harder and experiencing higher rates of change and work pressure. And generally they are right. But more than this, it's often about a stronger sense of lack of recognition and loss of professional status, of decline relative to their historic position and what they regard as comparators in the private sector.

As an NHS-employed acquaintance told me recently over a coffee: 'I never went on strike until three years ago, when a friend was evicted as she couldn't afford her rent increase. She's working agency now because there's more money, more flexibility on hours, and they have a stronger voice to say "no".'

Frances O'Grady, the general secretary of the TUC, claims that: 'Our polling shows there's huge support to scrap the cap right across the political spectrum, including from Tory voters... There is no doubt that the world has shifted'.

It is surely a good thing that this issue has emerged from the relative obscurity of remuneration bodies and thinktanks in Whitehall and has now taken centre stage in political and social debate about the sort of society and country we want to live in. We can and probably should invest more in our public services and pay many of these workers more, in my view, even with their often more generous pension plans compared to the private sector. But we need to do so realising that we all fund these awards through taxation, which in turn affects our own living standards.

Pay decisions, for public sector workers but equally for private sector chief executives and bankers, are ultimately not determined by 'iron laws' of economics and markets, they are socially mediated judgements and should reflect the whole of society and our values[1]. Remuneration committee chairs as well as prime ministers might want to brace themselves for more surprises and shocks if they fail to take account of this in the months ahead.

[1] Duncan's PhD research on reward strategy as a social and political process is summarised in a forthcoming book chapter to be published by Routledge, 'Can Reward Management ever be Strategic?'.

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Any views expressed are those of the author and not necessarily those of the Institute as a whole.