WIREDGOV

Reforming the way public sector workers are paid could play a vital part in boosting the economy and improving public services.

Policy Exchange says that rebalancing the pay and pensions of public sector workers so that they are in line with that of equivalent workers in the private sector would save £6.3billion a year in public spending. This money would be better spent on tackling local unemployment and could create at least 288,000 private sector jobs – or the equivalent salaries of 332,000 more nurses or 252,000 more teachers - in some of the areas of the country suffering most from the impact of the recession.

The report – Local Pay, Local Growth – says that the public sector 'premium' – the additional pay a typical public sector worker receives over a private sector worker – now stands at around 7% for the average worker. Combined with increased generosity in pensions the total ‘premium’ is nearly 14% for the average worker in the public sector. In some parts of the country, some public sector workers are seeing premiums over their private sector counterparts that are as high as 25%.

The report, co-written by a former Treasury civil servant, argues that this situation has arisen because of the system of national pay bargaining, which means that workers are paid the same amount regardless of where they live. It recommends abolishing this system and enabling local public sector employers to choose systems of pay that reflect local living conditions and vary pay awards by the performance of employees.

It says that, despite accounting for around £180billion of government spending (12.3% of GDP) - over half of all public money spent on schools, hospitals and the police - the current system of paying public sector workers by nationally-set pay bands:

- Damages the economy since it wastes valuable public money that could be used to boost growth and cut unemployment on areas being hit hardest by the recession

1 http://www.bristol.ac.uk/cmpo/publications/papers/2012/wp293.pdf 

http://cep.lse.ac.uk/pubs/download/dp0843.pdf 

Moving to a system where public and private sector pay and pensions are aligned will take time so in the short term, the report also recommends a permanent freeze on annual pay scale uplifts and the abolition of automatic pay progression points. Pay increases for public sector employees across the

country should then be based on a system of performance related pay - with total increases in each area tailored to reduce the existing pay differential between public and private sector employees.

Savings would be ring-fenced for extra public expenditure in the areas affected. Nowhere would see a fall in public expenditure as a result of these policies.

The report predicts that any move to abolish national pay bargaining will be met with significant opposition from the trade unions but calls on the government to push ahead with the reforms which will deliver increased growth, reduced unemployment and better public services.

Matthew Oakley, co-author of the report, "The current system of national pay bargaining is bad for the economy and bad for public services. Moving to a system where local public sector employers can decide how to negotiate salaries with employees will enable top performing public sector workers to be paid more, increasing productivity and improving public services.

"Our proposals would mean that not a single penny would leave poorer regions. All the money would be ploughed back into reducing unemployment and boosting growth in the poorest parts of the country."