Public sector pay policies

In early February, in response to five independent pay review bodies' reports recommending pay awards for 1.3 million public service employees, the UK Government announced that the increases should be paid in two stages. These awards influence significantly the level of pay settlements for more than five million public sector employees which, for the last four years, have had to be accommodated within a government policy that pay increases should be financed by efficiency gains within an overall paybill freeze. This feature examines the background to current policies, explores the political sensitivity of public sector pay and expenditure decisions in the run-up to a general election, and identifies the pressures that may force any new government to amend the policies over the next few years.

Pay review bodies

Three independent pay review bodies were created more than 25 years ago in what has been described as an attempt "to remove a range of highly sensitive settlements from the political arena" (P Bassett, The Times, 7 February 1997). They recommended pay increases for doctors and dentists, the most senior grades in the armed forces, the civil service and the judiciary, and for the rest of the armed forces. The pay review system assumed greater importance when it was extended to cover nearly 500,000 nurses, midwives and other health service professionals in 1983 and a similar number of schoolteachers in England and Wales in 1992. In both cases, the creation of pay review bodies followed lengthy disputes and a history of repeated failure of the negotiating machinery to produce agreement on pay settlements without frequent arbitration or periodic special enquiries.

The membership and terms of reference of review bodies are determined by the government. They receive written and oral evidence from government departments, public employers and trade unions and commission their own research. The review bodies make recommendations to the government which can be rejected or modified if there are "clear and compelling reasons" to do so. In practice, governments have frequently staged or delayed the full implementation of the recommended pay increases, as has happened this year. The government seeks to reduce the annual paybill costs of the awards and to limit their potential impact on pay settlements elsewhere in the public sector.

The 1997 awards

In 1997, nurses and school teachers will receive the 3.3% increase recommended by their review bodies in two stages; a 2% pay rise in April followed by a 1.3% increase in December 1997, adding an estimated 2.4% to the annual pay bill in each case. Slightly higher two-stage increases were agreed for doctors and the armed forces, partly to compensate for the declining value of pensions and higher accommodation charges respectively. The largest increases (up to 7%) were agreed for some of the most senior civil servants and Judges, although only 2% will be paid in April and the second stage increases due in December could be frozen if there is a Labour government, according to press reports.

Representatives of public service trade unions and professional associations strongly criticised the Government's decision to implement the pay increases in two stages; for the second successive year their members have to wait eight months before they receive a significant part of their recommended pay increase. In contrast, local authority and health service employers argued that even with staging, the pay increases could not easily be financed within existing and planned budgets. The director of the National Association of Health Authorities and Trusts was quoted in the Financial Times as criticising

"a ridiculous situation where we have an independent review body making recommendations for pay when they have no responsibility for managing the service ... either we keep the review bodies and the awards are funded properly, or we get rid of them and the health service sorts pay out within the cash available".

Similar arguments concerning the link between pay increases and financial constraints have been made by employers in other parts of the public service still covered by national collective agreements.

Commentary

For the last 15 years, the Government has contained public sector pay bills through strict cash limits on expenditure that have forced managers to implement job losses and changes in working practices and conditions of employment to meet annual targets for "efficiency gains" Government ministers have also advocated more decentralised and flexible systems of pay determination, but national pay agreements, buttressed by the pay review system, have proved to be resilient outside the civil service. For the last four years, the Government has strengthened its control of public service pay by insisting that, within a pay bill freeze, any pay increases must be offset by efficiency gains or productivity improvements. The policy has achieved several of the Government's objectives: the average level of pay settlements has been close to the fairly low level of inflation and below the level of settlements in manufacturing and the privatised utilities; and the policy may have encouraged some devolution in pay bargaining.

Public sector pay policies in the UK, however, have rarely survived more than three or four years without producing widespread conflict based on pay grievances or anomalies, or serious management problems concerning the recruitment and retention of staff. Even though the Labour Party has announced that it will retain the core public expenditure plans set by the current Government until April 1999, and continue the paybill freeze for the first two years if it wins the next election, it seems unlikely that the current policy can be sustained for several reasons:

  • the public spending plans for the next two years are extremely tight and "few independent economists think that ... they are achievable" (according to the Economist magazine). Moreover, the impact of aggregate expenditure plans on individual service organisations is unpredictable and uneven, so that the employers' capacity to make sufficient "efficiency gains" year-after-year varies considerably;
  • in the health service, in schools and in other parts of the public services, there is already evidence of severe shortages of qualified staff in particular specialisms, and the review bodies have reported widespread problems of motivation and morale; and
  • the insistence that pay increases must be offset by improvements in efficiency or productivity has increased the grievances of public service staff because there is no evidence that differences in the pattern of pay settlements have any relationship with variations in productivity, however it is measured, within and between services.
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