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Matthew Oakley: How a northern pay-restraint-for-more-infrastructure deal would work

Screen shot 2012-09-03 at 15.51.58Matthew Oakley is head of economics and social policy at Policy Exchange. His latest report, on which this article is based, is Local Pay, Local Growth. Follow Matthew on Twitter

Will a new runway at Heathrow or Boris Island solve this country’s growth problem? Boosting airport capacity may well help in the long term, but you only have to look at the delays over HS2 and the likelihood of upcoming legal wrangles to realise that, by their nature, large infrastructure projects take a long time to get off the ground.

With one in ten people currently unemployed in the North-East, the Coalition needs an approach which delivers growth and jobs now and ensures that all parts of the UK – not just the South-East - see the benefits. One answer may come from reform of public sector pay.

Pay in the public sector tends to be negotiated through national collective agreements with the 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.
But 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.

In fact, by following examples from the private sector and from other countries and 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. The logic is in fact quite simple. We are currently re-distributing large sums of taxpayer money from South to North through over-inflated public sector salaries. This money would be better spent in boosting investment and growth and creating jobs.

To do this, a system of discretionary pay increases based on performance should be introduced across the public sector and used to reduce the gap between public and private pay. Any savings that this leads to should be ring-fenced for growth enhancing expenditure in the same areas. Local people should have control over how the money is spent. Taking the North East as an example. This could mean extra money for the extension of the Enterprise Zone that the Chancellor has just announced or a further expansion of its size.

Over the longer-term, by equalising pay and pensions between public and private sector workers, the government could free up some £6.3 billion a year for investment across the country. This money could be used to create hundreds of thousands of jobs.

Unions will claim foul play, but by opposing these reforms they are damaging growth, increasing unemployment and damaging our vital public services. The Coalition has a chance to boost growth in regions that have been suffering for decades. It must be ambitious with its reforms and not be sidetracked by vested interests.


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