Frances O’Grady: The proof that public sector pay cap is harming our economy

This is part of a series of articles in the run-up to the Budget on Wednesday.

On public sector pay, trade unions and the Labour Party have already won the argument. There’s barely a voice in the land arguing that we should still be cutting the take-home pay of nurses, teachers, social workers and other hardworking public servants.

So while there’s lots we want from tomorrow’s Budget – more public investment, a response to the living standards crisis, action to deliver great jobs – a pay rise for public servants should be a no-brainer.

Indeed, since the general election Tory MPs and cabinet ministers have been insisting that it’s time for the government to change course, having learned on the doorsteps that voters want a better deal for our public services.

That’s why prison and police officers, firefighters and some teachers have been offered new pay deals above the one per cent cap.  

And it’s why chancellor Philip Hammond is set to announce that he’s setting new money aside for an increased pay settlement for nurses in 2018.

But, while we’re glad to see the government in retreat, their actions to date have been nowhere near sufficient. Of the increased pay settlements announced so far, none have matched inflation. So these aren’t pay rises, they are further real-terms pay cuts.

Our analysis shows that under recent pay awards, a prison officer will be earning £980 less in real terms by 2022, a police officer will be £450 down and a firefighter will be £515 worse off.

What’s more, millions of public service workers have seen no improvement at all. As inflation soars, they’re facing devastating real-terms cuts.

Instead of offering a serious response to the pay squeeze, the government is offering half measures.

So we at the TUC are setting out five key tests that we believe should underpin a fair pay deal for public services workers.

• Firstly, Whitehall needs to stop dictating the terms. Instead, employers and unions should have the freedom to determine pay awards that work for their sector, either through collective bargaining or genuinely independent pay review bodies.
• Secondly, pay awards need to be funded with new money, not through more cuts to already-stretched departmental budgets. Our schools, hospitals, prisons and care services are already creaking after years of deep spending cuts. A fair deal for public servants should not be delivered at the expense of the services they run. 
• Thirdly, we don’t want to see a pick’n’mix approach to fair pay – with some high-profile sectors getting improved pay deals while others are left behind. As any teacher, nurse, police officer or firefighter will tell you, our public services are a team.
• Whether they are frontline or backroom, and whatever their pay grade, no group of workers should be excluded from the lifting of the pay cap. Delivering for some and not others would be cynical, unfair and extremely damaging to morale.
• Fourthly, the prime minister claims that she appreciates the sacrifices that public sector workers have made in the last decade. If she really means that, then new pay awards should take into account the real-terms loss of pay over the last seven years. Workers have endured years of cuts, and we need to find a way to recoup those losses going forward. A pat on the back is not good enough.
• And, finally, it’s a scandal that poverty pay still exists in our public service. Thousands of staff in our hospitals, schools and local councils still earn barely more than the minimum wage. So any new pay deal should come with a guarantee that no public service worker earns less than the real living wage.

How can we afford it?

Even though an overwhelming body of evidence now shows that austerity has failed, the government continues to justify the pay cap in terms of fiscal restraint.

Even in nominal terms, we can afford to lift the cap. The IFS has found that increasing the pay of public servants in line with inflation would cost £4.1bn a year. That sounds like a lot but is actually equivalent to just one per cent of departmental spending.

What’s more, as research by the IPPR has shown, over 40 per cent of that headline cost will be recouped by the Treasury in the form of increased tax and national insurance revenues from public sector workers, a reduced in-work benefits bill and the wider benefits of GDP growth.

So if you look at the big picture, it’s clear that we cannot afford not to increase public sector pay. The pay squeeze is constraining working people’s spending power, which in turn is contributing to the economy’s sluggish growth.

This year alone, the public sector pay cap has reduced spending power in England by £8.5bn, as new TUC analysis shows. Since the pay cap was first introduced seven years ago, public sector workers have had £48bn less to spend in their local economies.

And while every region has been hard hit, the north east and north west have been hit especially hard, since they have the biggest proportion of public sector workers.

Our economy is already suffering the effects of the longest pay squeeze since Victorian times – and Brexit is only going to make things worse.

So increasing public sector pay isn’t simply the right thing for the chancellor to do on Wednesday. It’s also what’s best for the economy.