Even if real pay is cut by 5%, public sector workforce may need to be cut by more than 200,000 by 2024 to stay within current spending plans

Public sector workers will receive pay awards of around 5% this year, on average. That is simultaneously below inflation of around 10% – meaning a 5% real-terms pay cut for millions of employees – and above what was budgeted for in departmental spending plans, fixed in cash terms last autumn.

Keeping to those spending plans – as the new government claims it will – would leave departments having to find around £5 billion of savings this year to fund higher-than-expected pay awards. That could mean reducing the workforce by more than 100,000 this year to ‘pay for’ the higher-than-budgeted awards while sticking to the same overall wage bill. If this real-terms pay cut is consolidated, and pay rises with inflation the following year, another 100,000 jobs could be lost unless more money is forthcoming.

These are amongst the findings of new research from the Institute for Fiscal Studies, published today as a pre-released chapter of the 2022 IFS Green Budget (produced in association with Citi and with funding from the Nuffield Foundation).

All of the above is on top of any additional non-staffing costs faced by schools, hospitals and other public sector institutions as a result of soaring inflation. There is much talk of the Chancellor looking to cut public service spending to shore up the public finances in light of his recent unfunded tax cuts. Yet departmental settlements are already far tighter than originally intended. Any further cuts would be on top of that. Asking departments to make further ‘efficiency savings’ or to ‘trim the fat’ ignores the fact they are already having to do so just to stay within existing budgets in the face of substantially higher costs.

Even the higher-than-budgeted 5% pay awards may not be enough to head off concerns around recruitment and retention – or to head off widespread industrial action. Public sector pay will fail to keep pace with inflation this year, and is likely to lag behind pay growth in the private sector. This comes after more than a decade in which public sector pay has already been falling relative to the private sector and, for many public sector jobs, falling in real terms. Average public sector earnings in July 2022 were 4.0% lower in real terms than 15 years earlier (versus 0.9% higher in the private sector). The public–private pay differential is now less favourable to the public sector than at any point in the past 30 years.

On the other hand, public sector pensions are far more generous than those available in the private sector, and remuneration is much more skewed towards pensions. More than a fifth of the remuneration of an average public sector worker comes in the form of pensions, against less than 8% of total remuneration in the private sector.

There is a strong case for rebalancing public sector remuneration away from pensions and towards pay. Take-home pay could be increased by reducing employee pension contributions and cutting pension promises commensurately. This would increase take-home pay immediately, without increasing costs for employers, and still leave public sector workers with much better pensions than their private sector counterparts.

Bee Boileau, Research Economist at IFS and an author of the research, said:

‘Offering higher pay awards without additional funding puts enormous strain on departmental budgets and requires painful cuts elsewhere. Not offering higher pay awards risks a wave of strikes and ongoing challenges with recruitment and retention. But providing additional funding to departments would mean offsetting spending cuts elsewhere, or a U-turn on some of the Chancellor’s recent tax cuts, if he is serious about having debt falling as a share of national income. There are no easy options, and navigating these trade-offs will be one of the central fiscal choices for the new Chancellor.’

Laurence O’Brien, Research Economist at IFS and another author of the research, said:

‘Pay in the public sector has consistently fallen relative to the private sector for the last decade. Meanwhile, public sector pensions look increasingly generous compared with their private sector counterparts. The rising cost of living and the squeeze on family budgets make this set-up seem increasingly unbalanced. Many public sector workers might well prefer to put less of their own money into a pension via employee pension contributions, and instead to receive higher take-home pay today and a slightly less generous pension offer tomorrow. This change, if it could be agreed, could improve public sector workers’ welfare with no change to the costs for their employer. It could also prevent a potential rise in pension opt-outs in the public sector.’

Mark Franks, Director of Welfare at the Nuffield Foundation, said:

‘Under current plans, public sector employees and their families will face increasing financial pressure as the costs of living rise and some workers lose their jobs. These plans also pose risks to the recruitment and retention of people in key public sector roles and will have a knock-on impact on the delivery of vital services, which are already under extreme strain. There is no easy route to bringing government spending under control while maintaining and improving the delivery of public services. However, cost-neutral options such as offering public sector workers more flexibility in choosing the right balance between their pay and pension contributions should be given serious consideration.’

On the comparison between public and private sector pay, the research finds that:

• The raw difference between hourly pay in the public and private sectors has fallen from 13% in 2007–08 to 7% in 2021–22. This does not account for the fact that public sector workers tend to be more educated, older and more experienced: after adjusting for this, the public–private pay differential has fallen from around 3% in 2007–08 to slightly below zero in 2021–22, lower than at any point in the past 30 years.
• Employer pension contributions are significantly more generous in the public sector. Whereas almost half (47%) of public sector employees received an employer pension contribution of at least 20% of their pay in 2021, the same was true of just 2% of private sector employees. The relative generosity of employer pension contributions in the public sector has been increasing over time.
• When we look at the gap in total remuneration – accounting for differences in both pay and pensions between the public and private sectors, as well as differences in employee characteristics – the public–private differential was around 6% in 2021. In other words, total remuneration for public sector workers is on average 6% higher than for their private sector counterparts. This measure has also fallen in recent years, but to a lesser extent than when considering pay alone.

Sector Response

Geoff Barton, General Secretary of the Association of School and College Leaders, said:

“This IFS report is a badly needed dose of reality which exposes the recklessness of the government’s spending plans for the public sector, including the potential devastating impact on schools and colleges.

“We have repeatedly warned that rising costs – including pay awards for which there is no additional government funding – are simply unaffordable within current budgets, and that schools and colleges will have to make significant cuts to provision.

“To be clear, these national pay awards are very much needed, deserved and should go a lot further. But it is simply ridiculous that the government expects them to be paid without providing money for schools and colleges to pay them.

“Combined with other rising costs, this will inevitably necessitate a reduction in staffing numbers because this is the largest cost and that will in turn mean cuts to the curriculum, larger class sizes and less support for children who need extra support.

“The notion that the government may seek additional ‘efficiencies’ on top of this is genuinely chilling.”