Public Sector Pay Cap

Lord Haskel Excerpts

Thursday 13th July 2017 Lords Chamber

Asked by

[Lord Haskel]

To ask Her Majesty’s Government whether they intend to review the one per cent cap on public sector pay.

[Lord Haskel (Lab)]

My Lords, we have been through difficult times these past few weeks. The response of our police, fire and ambulance services, our security and social services, our hospitals and our doctors has been absolutely outstanding and inspirational. But when we realise that, because of pay restraint, their earnings have effectively decreased in recent years, some of us feel a little bit awkward—not to say hypocritical. That is why in recent weeks, this topic has generated lots of heat but very little light.

As a result, I thought that noble Lords on all sides of the House would welcome a more measured debate that generates more light than heat, because these events remind us how much we depend on our public services. In 2015, the Chancellor announced that the Government would fund public sector workforces for a pay award of 1% for four years. In the debate on the Queen’s Speech, the Government voted down a Labour amendment to end this 1% pay cap. Self-inflicted heat was generated when, despite this, anxious Ministers concerned about recruitment and retention in their departments pressed for pay rises above 1%. They referred to the recommendations of the Government’s independent pay review boards. More heat is generated because of the obvious split in the Cabinet, with the Chancellor taking a firmer, more rigid view. Conservative Home adds to the heat by telling us that this behaviour is manoeuvring for the leadership of the party, and tweets create yet more heat by referring to finding £1 billion on a money tree in Belfast.

So let us see whether we can throw a bit more light on the subject. To do so, we need to know that there are eight pay review bodies, mainly covering the vocational part of the public sector, which recommend pay levels in their sectors. They take evidence and send their recommendations to the Government. They were originally created to avoid protracted disputes but, since 2010, when inviting them to make their recommendations, the Government have also told them what they expect the results to be. When you do a management course, lesson one is: do not blur the lines of responsibility and accountability. Otherwise, you cause confusion and irritation, which is exactly what has happened. Either we have pay set by the review bodies, or by the Government. The current system blurs responsibility, creates dissatisfaction and certainly does not help to produce a thriving public service.

The letter to the review bodies setting out their work for 2018-19 will soon be going out. What will it say: to review pay by looking at the evidence, or not to bother, because of a cap of 1%? In France, public service pay is determined by central government, but at least that is honest.

Many think that this dismissive attitude towards pay review bodies stems from years of ideological assault on public services: private good, public bad. But we have learned that even when public services are contracted out to the private sector, it costs taxpayers more than they think. It is estimated that nearly 1 million low-paid private sector workers actually work in outsourced public service jobs—social care, school staff and hospital service staff. Many of the contracts to supply those services were won on the basis of low pay, so it is not surprising that most of those 1 million workers rely on tax credits to make ends meet. So the taxpayer pays in the end, but from another pocket.

Lifting the pay cap may enable public sector employers to provide better value by being better employers, instead of contracting out to employers subsidised by tax credits who rely on the minimum wage.

Both manifestos in the recent election spoke of the state becoming more active: more active government. One reason why this Government have put a cap on public service pay is that productivity, on average, is static—in the public and private sectors. In his Statement last Wednesday in reply to a question on productivity in the public sector, the Minister replied in terms of growth. What he did not say is that many workers are now more expensive to employ per unit of output because of low productivity, and that is why there is a pay cap. Yet the Government have an industrial strategy partly designed to deal with this. Can we not review this strategy before the White Paper is issued, with particular reference to raising productivity in the public sector as a means of removing the pay cap?

Charlie Mayfield’s report on Tuesday, launching a movement to raise productivity through better management and skills, applies just as much to the public sector as to the private. Is the public sector working with the catapults or with Innovate UK? My inquiries say, only indirectly. I put it to the Minister that this is a much more constructive narrative than having a pay cap, and that it is within this narrative of greater productivity and improved public services that one can speak of tax rises. Surely they will be inevitable. Within this narrative, one can justify continuing to broaden the tax base, as the Government are already doing on expensive homes and flats. They can extend council tax beyond band H and bring heavier taxes on activities which damage the environment. That makes sense in this changed narrative of better public services. It makes a lot more sense than a pay cap.

Some compare pay in the public and private sectors. It is complicated but a recent paper from the National Institute of Economic and Social Research shows that, taking into account pensions and other benefits, pay restraint has meant that public sector workers have lost 12% since 2010 while private sector workers have lost 2%. So, the pay of public and private sector workers has now become more or less equal.

It was not surprising that on Monday we received a report from the education review panel drawing our attention to serious staff shortages and recruitment and retention problems. We had reports of 96,000 teachers taking strike action in the 12 months to May. We have had similar warnings in health, care and local authority services. Cabinet Ministers are rightly worried about this in their own departments, yet the Treasury’s official position is that the 1% pay cap holds.

I have tried to point out the dishonesty of and damage caused by hiding behind the pay review bodies. I have tried to point out the cost to the taxpayer in money terms and inferior public services, and how caps can lead to cuts, and I have tried to point out what can be done about it by a Government who believe in action. I look forward to hearing what other noble Lords and the Minister have to say.