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Nick Faith: Osborne should announce local pay bargaining in the Budget

Faith nickNick Faith is Director of Communications at Policy Exchange. Follow Nick on Twitter.

Who do you trust more to handle the public finances? This is the most pertinent question a pollster can ask. Regardless of how big a lead Labour has in the polls – and trust me that lead is not nearly as big as it should be at this stage of a Parliament – Ed Miliband and Ed Balls still trail David Cameron and George Osborne when it comes to the question of economic competency. If they don’t start eating in to this lead, then the 2015 election will be tighter than most ‘experts’ are already predicting.

Which leads me to the Budget. The media has begun its countdown to the 20 March. The starting pistol was fired on Friday night following the news that a ratings agency had downgraded Britain’s AAA rating for the first time in 35 years. Some on the Right predictably called for a change in direction based on tax cuts for everyone and fewer regulations. Ed Balls responded by admitting that Labour would borrow more to boost growth if they were in government.

Osborne is left in somewhat of a dilemma. He must produce a Budget that is attractive to two audiences. Firstly, he has to come up with an initiative which will be seen as fair to the ordinary person trying to get on in life or the ‘striver’ (a word that I object to – when was the last time you heard someone in the pub use it?). Secondly, he needs to give his party something that keeps the attack dogs at bay. You only have to look at anonymous briefings from “senior sources in the party” over the weekend to see that there is more than an iota of discontent towards the Chancellor’s performance to date.

There is also a third element to the Budget. Any major announcement must be seen as helping drive growth outside London and the South East. The Conservative Party has identified a number of seats that they will need to win to stand a chance of gaining a majority at the next election. A number of these marginals are based in urban towns in the Midlands and the North. Unless there is a credible story with real life examples setting out how the Tories have created jobs and boosted the local economies in those areas of the country then the door knockers will struggle to persuade voters that the party understands them and their concerns.

Is there a policy that ticks those three boxes? Yes, local pay bargaining.

At the moment pay in the public sector tends to be negotiated through national collective agreements with the trade unions, meaning that nurses in Doncaster get paid the same as nurses in Devon. This has caused large differences between public and private sector pay to develop. Recent estimates from Policy Exchange suggest that the difference in pay that a public sector worker might expect compared to their private sector equivalents ranges from around an 11% premium in the North East to around a 6% penalty in the South East.

Failure to reflect local labour markets mean underpayment for some jobs and overpayment for others. Where pay is set too low, academic studies have linked it with high vacancy rates and turnover causing higher fatality rates in hospitals and lower exam results for schools in deprived neighbourhoods. Where pay is too high, there is evidence it ‘crowds out’ the private sector by bidding up wages and making it difficult to recruit good staff.

Another issue is that annual pay progression is based on time served rather than performance. To take the example of teachers, the proportion moving up the main payscale each year is nearly 100 percent, despite the theoretical condition of satisfactory performance. This is linked to lower productivity and morale than the private sector (reflected in things like sickness absence). A locally-facing pay system could address these problems.

Were reforms to ensure that public workers were remunerated at the same level as their equivalents in the private sector (accounting for things like age, gender, qualifications, local areas, hours and pensions), we would make a huge saving: some £6.3 billion a year. If this money was simply returned to the Treasury, this could indeed have an adverse impact on deprived areas. Trade unions and politicians from both sides of the House have argued that any attempt to localise public sector pay negotiation would reduce wages of public sector employees in the weakest parts of the country and take money out of struggling economies which are most reliant on public sector jobs, often due to previous attempts to tackle the effects of deindustrialisation.

However, this does not have to be the case. To ensure that poorer regions do not lose out, Osborne could set out how he intends to reinvest the money through local job creation and infrastructure projects. This would create at least 288,000 jobs – and in some of the most deprived regions of the UK.

For the government, getting unemployment down, especially in areas outside the South East, is essential. By ensuring that public sector pay reflects both local conditions and performance of employees, we could both improve public services and spur growth in the areas that need it most. That’s the rabbit Osborne could pull out of his hat in three weeks time.


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