The way UK public sector wages are set is being called into question after high inflation and tight government spending have put the system of independent pay review bodies under extreme strain.
With striking nurses and ambulance workers in deadlock with the government over pay, and the results of teacher ballots for industrial action due in early January, unions are increasingly debating whether public sector pay review bodies are a fair means of setting wages.
The eight bodies, which cover 2.5mn public sector workers and negotiate £100bn worth of pay a year, have withstood periods of high inflation in the past — especially in the late 1980s — and until now had the support of both unions and the government. But disputes this year have left trust in the system at breaking point.
How much strain is the pay review system under?
This is probably the most difficult period in its history. Born as a result of pay conflicts between the government and NHS doctors in 1963, and extended to 45 per cent of public sector workers thereafter, independent pay review bodies have traditionally been supported by all sides as a means for determining wages that keeps public sector incomes in broad alignment with similar private sector remuneration.
But public sector unions have lost trust in the independence of pay review body recommendations and many are now threatening to boycott the process next year, demanding direct collective bargaining with ministers instead.
Pat Cullen, general secretary of the Royal College of Nursing, said her union had been “hoodwinked into lending credence to this process for years” and patience was now running out.
“The government is using the pay review body for cover and for this exact reason unions like us are seriously looking at whether we take part anymore,” she said.
Elsewhere in the health sector, the GMB union, which represents ambulance drivers among others, has said it is pulling out of the process next year and will not submit evidence to the NHS pay review body. The Unite union, which claims to represent 100,000 public sector workers, said the bodies were “not fit for purpose”. Senior health sector managers, represented by a joint venture between Unison and the First Division Association say the “writing is on the wall” for the pay review system.
Kevin Courtney, the joint general secretary of the National Education Union, told the FT that education unions were widely considering a boycott of the process next year because “the government was hiding behind the [pay review bodies’] so-called independence”.
In contrast, ministers fully support the process. The Department of Health and Care said pay review bodies were staffed by independent industry experts and encouraged unions to participate in the process next year.
“Pay review bodies carefully consider evidence submitted to them from a range of stakeholders, including government and trade unions,” it said. “They base their recommendations on several factors including the economic context, cost of living, recruitment and retention, morale and motivation of NHS staff.”
Is high inflation causing the problems?
No. Jerry Cope, chair of the NHS pay review body from 2011 to 2017, said there should be a recall of the 2022 review, adding that the evidence considered by the body was gathered in February and “probably out of date by the time [the report] was published” in July.
But in its report, the body expected inflation to rise to 10 per cent, not far below October’s peak of 11.1 per cent, so high price rises alone were unlikely to be behind the problems.
The pay review system has this year had to contend with high prices coinciding with three year departmental spending plans that assumed 2 per cent inflation, as well as a long period of weak economic growth that has led to disappointing tax revenues. Moreover, the UK is poorer as it has to pay higher prices for energy, which is mostly imported.
As a result, public sector pay levels have fared poorly compared with the private sector. Private sector wages in the three months to October grew at an annual rate of 6.9 per cent compared with 2.7 per cent in the public sector.
By contrast, in the late 1980s, when the then headline inflation rate reached 10.9 per cent, productivity growth was stronger and spending reviews were conducted annually — so could adjust quickly for high inflation. Tax revenues were also soaring and the government met NHS pay review body recommendations that kept pay in line with inflation.
Professor Richard Disney of Sussex University, who has sat on multiple pay review bodies in the past, said the gulf between the government’s offer of a 3 per cent pay uplift and union demands of 19 per cent suggested there was a damaging loss of faith in the system.
“Calls for the recall of the review body are a mistake; it risks dragging an independent body into what is now an industrial dispute between the government and the NHS staff unions,” he warned.
Are the pay review bodies independent?
Pay body members are appointed by ministers but according to Cope they “fiercely guard their independence”.
However, union leaders complain that the independence of the individuals who sit on the bodies is compromised because their remit is set by the government and it requires them to have regard to affordability constraints, departmental spending plans and the government’s 2 per cent inflation target.
Disney said these conditions constrained what the bodies could determine as a fair settlement. “You don’t want to recommend something that is likely to be rejected [by ministers],” he said.
But he added that the bodies have more independence today than at other times — such as when they had to impose a government mandated public sector pay freeze in the austerity years after 2010.
Ben Zaranko, senior economist at the Institute for Fiscal Studies, said the Treasury’s spending plans played a large role in the outcome of pay review recommendations and while affordability was important, other parts of the remit given to the bodies made little sense.
“There is no reason pay review bodies should be fine tuning [public sector] wages to affect economy wide inflation,” he said, adding that was the Bank of England’s job.
Is there a solution to the impasse with the unions?
The government has already started the 2023 pay review and with unions debating whether to participate, a resolution of the 2022 dispute is needed for next year’s process to be meaningful.
Disney said it would take too long to reflect falls in public sector pay relative to the private sector in the 2023 process, so he urged ministers to find extra money for a one-off non-consolidated payment in the meantime to settle the disputes.
“No doubt the Treasury would resist substantial payments in the face of its anti-inflation strategy, but . . . increases in earnings present a much lower risk to increasing the rate of inflation compared to some of the other fundamental drivers,” such as energy prices, he said.