Public sector pay freeze could save up to £23 billion by 2023

Freezing public sector pay for the next three years could save a cumulative £23 billion, according to leading centre-right think tank, the Centre for Policy Studies.

A new report by the think tank argues that since the start of the pandemic, private sector workers have suffered far more than those in the public sector, and makes the case for public sector pay restraint over the next three years to ensure the labour market isn’t unfairly weighted towards the public sector.

The public sector currently employs roughly 5.5 million workers, at a total cost of around £190 billion a year, and this could increase substantially over the next few years unless the government exercises pay restraint.

‘Public Sector Pay: The Case for Restraint’ suggests that if pay were to be frozen across the public sector, the Government could save £3.8bn in year 1, £7.7bn in year 2 and £11.6bn in year 3. If NHS staff were exempt from the freeze, to account for their hard work and sacrifices during this pandemic, the Government could save a cumulative £15.3 billion over the same period.

The paper also sets out a more generous approach, which would see pay increasing by 1% each year for three years, which could save £11.7 billion over that period – or £7.7 billion if a higher rate were still granted to healthcare workers.

Those employees who benefit from incremental pay rises would still see their pay increase if they move up their pay band.

The Government placed a cap on public sector pay in 2012 to ensure those in the private sector were not left behind following the financial crisis of 2008/09, however this cap was lifted in 2018 and the pandemic risks creating the same disparity. The result being that public sector advantages over the private sector, in terms of higher pay, greater job security and significantly better pension provision, will increase further still.

Pension provision, for example, is vastly more generous in the public sector, with 86% of public sector workers receiving employer pension contributions worth 10% of earnings or more, compared to just 10% of private sector workers.

The CPS is concerned that the financial impact of the coronavirus could affect private sector workers in a similar way to the previous recession, making it necessary and fiscally responsible to adjust pay policy in the public sector to ensure a fair and efficient labour market.

Robert Colvile, Director of the CPS, said: “The economic impact of the Covid-19 pandemic has been severe, but the pain has not been shared equally. Some businesses are folding under the strain, public finances have been decimated, while the public sector has escaped relatively unscathed.

“Healthcare workers aside, it is difficult to justify generous pay rises in the public sector when private sector wages are actually falling. At the same time, there is a need to control public spending and reduce the structural deficit which the pandemic is likely to have opened up.

“The Chancellor should redress this imbalance by showing restraint when it comes to pay and pensions in the public sector.”