New Economics Foundation report: Regional pay rates could cost £10 billion a year

Government plans to introduce regional pay rates for the public sector could cost the economy almost £10 million a year, according to a report published by the New Economics Foundation (NEF) and commissioned by the Trades Union Congress (TUC).

The proposals to introduce regional pay rates were first put forward by the Chancellor in the 2012 Autumn Statement and then confirmed in the 2012 Budget.

NEF conducted an in-depth analysis of the arguments put forward by the government and found little evidence to support its position.

It looked at the economic impact and number of jobs that might be created, or lost, if local pay was introduced for schools, hospitals and other public sector employers.

To examine the likely economic impact of the regional pay proposals, NEF set out to explore a number of scenarios. One approach assumed that that the government is wrong and that there is no crowding out of the private sector by public sector pay.

The report concluded that with this worst-case scenario, where the pay of millions of public servants who live beyond London and the south east is brought down to private sector levels, as many as 110,000 jobs could be lost across England and Wales, and the cost to local economies would be £9.7 billion a year.

The report found, where NEF modelling assumed that the government is right and the pay of public servants is preventing private sector firms from recruiting because they are unable to match public sector salaries, the introduction of local pay rates for the public sector would only see the creation of 11,000 jobs across England and Wales.

Helen Kersley, head of Valuing What Matters at NEF, said: “The research finds no economic case for regional pay variations.

“Cutting the wages of public sector workers is a high-stakes gamble from which there will be no winners. Even in the very best case, where the private sector creates more jobs, the economy would be substantially worse off overall.

“Proponents of this policy must look again at the potential implications to avoid creating further harm in a fragile economic period.”

Brendan Barber, general secretary at the TUC, added: “Quite apart from the huge hit that public sector workers would have to take in their pockets if pay in parts of the UK is held down to allow the private sector to catch up, this report shows that the move would also prove hugely damaging to local economies.

“Despite the concerns being voiced by MPs in the parts of the UK most likely to be affected by the introduction of local pay rates, the government has so far refused to rule out this move that would hit public sector workers and their families, who are already feeling the financial pinch as they suffer the effects of a lengthy pay freeze, very hard.

“We hope that the report, combined with the findings of the three pay review bodies due to report back to the government this week, will prove to be the final nail in the coffin for these proposals.”