HM Treasury News Release
107/97 16 September 1997
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CHIEF SECRETARY SETS OUT FIRM AND FAIR APPROACH
TO PUBLIC SECTOR PAY
The Government's approach to public sector pay next year will
be firm and fair, the Chief Secretary Alistair Darling
emphasised today. He set out the Government's public sector
pay policy in the publication of the annual evidence to the
pay review bodies.
He commented:
" We made it clear in our manifesto that we were
determined to put the public finances on a firm and
sustainable footing and to do that we were committed to
sticking to the existing spending totals for the first
two years of this Parliament. That means that the pay
review bodies must have regard to the affordability of
any award, since public sector pay accounts for one third
of public spending.
We are not going to repeat the mistakes of the past by
conceding pay awards which would undermine Britain's
long-term economic prospects.By taking firm action now we
can build the conditions for long-term economic stability
that we all want to see.
Our aim is to pursue a firm and fair approach to public
sector pay, recognising the need to retain, recruit
and motivate staff, within tough cash limits."
The written evidence particularly asks the pay review bodies
to take into account the following key points:
- pay costs need to be kept within existing spending plans
- review body groups have done well in relation to other
public sector groups
- the new procedures for the inflation target and monetary
policy give greater confidence about future price
stability
and proposes that pay recommendations for the coming year
should be low, reflecting good inflation prospects, and
consistent with the need for departments to maintain the
delivery of services within their budgets.
It also stresses that the extra money allocated to education
and health in the Budget was for front line services and not
pay increases.
The full evidence is attached.
NOTES TO EDITORS
There is no public spending round this year. Pay costs will
need to be contained within existing spending plans. There
will be no access to the Reserve to fund spending on pay in
excess of those plans.
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ECONOMIC CONSIDERATIONS AND PUBLIC SECTOR PAY POLICY
This evidence presents the Government's policy and
expectations on public sector pay and the economic background
to the work of the pay review bodies in framing their
recommendations for the coming year.
Introduction
2. The Government's commitment to keep public spending
within the existing departmental plans, will be a key
consideration in determining pay in the coming year taking
priority over other general pay and price indicators.
3. The Government recognises that there are competing
pressures for the available resources. Nevertheless, it is
necessary to establish the right balance between pay costs and
public services for the pay settlements in 1998.
4. In particular, the Government believes that Pay Review
bodies must take account of the fact that Departments will
have to be able to afford the pay increases while maintaining
the delivery of services within their spending plans.
Recommendations should be low for this reason and to reflect
the good inflation prospects.
5. In support of this position the pay review bodies are
asked to note that:
- pay pressures generally remain subdued
- pay review body groups have done well in the past by
comparison with the rest of the public sector both in
recent years and over the longer term
- the inflation target, and the new monetary policy
procedures, give greater confidence in future price
stability.
Public sector pay
6. The Government is committed to keep total public spending
within the existing overall spending plans and to keep
departmental programmes within the specific spending plans
announced by the previous Government last November or, for
health and education, the plans announced in the July 1997
Budget. Pay costs will need to be contained within these
plans without recourse to the Reserve.
7. Public sector pay needs to be considered in that context.
Specifically, the Government intends:
- to take a firm and fair approach to public sector pay
- to resist unreasonable public sector pay demands, and
- to take account of the need to retain, recruit and
motivate staff
- within the framework of tough cash limits.
8. In total, the public sector pay bill is just under 90
billion Pounds, equivalent to approximately 30 per cent of
total public spending. The breakdown of the total is as
follows:
Chart: Public sector paybill (1996) broken down by pay
settlement groups[1]
9. For the pay review body groups, the total paybill is more
than 30 billion Pounds, equal to a third of the total public
sector pay bill. Pay settlements for these groups have
significant consequences both directly on the relevant
departmental spending plans and, by setting the tone for pay
settlements, indirectly in public spending more widely.
Public spending
10. The Government has embarked on comprehensive reviews of
departmental spending plans aimed at the better distribution
of available resources. Meanwhile, and specifically for this
year and next, the Government's commitment is to keep to the
overall spending plans announced by the previous Government in
their last Budget in November 1996.
11. This means that there will not be the usual annual public
expenditure survey this year. While Departments have
flexibility to adjust the distribution of resources within
their spending plans they must keep within the existing
totals.
12. For Health and Education, the totals include the
additional allocations from the Reserve and from the proceeds
of the windfall tax announced in the Budget in July 1997, but
it is important to recognise the purpose of these additions is
to spend more on services. In commenting on the additional
resources and the planning process now under way, the
Secretary of State for Health stressed the need to make sure
to get the maximum value for patients from the money that has
been made available. The Secretary of State for Education and
Employment specifically said he expected the School Teachers'
Review Body to take into account the need for restraint in pay
settlements so that the additional money can make a real
contribution to raising standards.
Pay settlements and earnings
13. Settlements have, over the last year, remained very
stable by most measures (see Chart). Settlements data include
the following:
- Industrial Relations Services (IRS) report that median
whole economy pay settlements for the three months to end
July 1997 was at 3 per cent for the 16th consecutive
month. Their annual figures for the 12 months to the end
of July show the median increase in settlements for the
whole economy was again at 3 per cent. It has been at
this level since October 1996. The annual median
increase in the public sector, which was at 2.9 per cent
over April to June fell to 2.5 per cent in July.
- In addition to sustained low levels of settlements, the
IRS evidence shows that the upper quartile of the
headline 3-month series for the whole economy has been at
or below 3.5 per cent since October 1996.
Chart
- Incomes Data Services (IDS) reported in August that just
under three in ten settlements from April onwards are
under 3 per cent, just over four in ten are between 3 per
cent and 3.5 per cent with the remaining three in ten
deals worth over 3.5 per cent. Around one in five deals
are concentrated at 3 per cent. The top end of the range
is heavily dominated by financial sector firms whereas
the public sector dominates the bottom end. Discounting
the public sector, the IDS found that the level of
private sector settlements was pretty similar in the
second quarter of 1997 to that in the first quarter. In
September, IDS reported signs of a pick-up in the level
of pay increases being awarded. But of the new
settlements they analysed, over half were for settlements
worth under 3.5 per cent.
- Settlements data collected by the Office of Manpower
Economics to inform some central pay negotiations show a
median of 3.5 per cent for private sector non-manual
total pay settlements for the year to 7 June 1997,
unchanged from 3.5 per cent in the year to 7 February.
- The latest CBI Pay Databank shows continued stability in
manufacturing pay awards which provisionally averaged 3.3
per cent in the three months ending June 1997, slightly
up on the 3.2 per cent average for the first quarter
ending March but down from 3.5 per cent for the three
months ending June 1996. Service sector pay awards
averaged 3.6 per cent in the three months to end June,
the same as in the three months to end March.
Average earnings
14. Average earnings generally increase faster than pay
settlements, reflecting the additional costs of other changes.
But the same degree of stability is reflected in whole economy
average earnings growth, which has been broadly stable for
more than four years. Average earnings growth fell back to 4
1/4 per cent in May 1997 from 4 3/4 per cent at the end of
1996. Earnings growth in manufacturing has remained at 4 1/4
per cent-4 1/2 per cent since February 1997. Average earnings
growth remains low by historic standards.
Trends in the 1990s
15. During the 1990s, pay settlements in the public sector
have, with some temporary fluctuations, moved in line with
private sector settlements. Over the seven years to March
1997, IRS median settlements have averaged just over four per
cent in both the private sector and the public sector.
16. There is, however, some disparity between settlements
within the public sector. Senior staff in particular have
benefited from settlements significantly above the rest of the
public sector. For the future, the Government's objective is
one of consistency and fairness across all public sector
groups and at all levels.
Inflation
17. The new monetary policy arrangements are expected to
establish a new climate of low inflation. Under the new
arrangements the Bank of England has operational
responsibility to set interest rates to meet the Government's
inflation target (defined as the 12-month increase in the RPI
ex MIPS) of 2.5 per cent. This new monetary framework provides
a long-term approach which is transparent, open and
accountable. As a result, long-term interest rates and
inflation expectations have already fallen.
18. The Bank of England's central projection for underlying
inflation 2 years ahead, published in its August inflation
report, is around 2 1/2 per cent. Their forecast has been
reduced mainly because of the three 0.25 percentage point
interest rate increases seen since June and the fiscal
tightening announced in the budget. The Bank's short term
profile for inflation is for "the twelve month rate to fall
below 2 1/2 per cent over the next year or so, but then begin
to rise as growth in the economy picks up."
19. The average of the Treasury's compilation of independent
forecasters views on inflation (RPI ex MIPS) published in
September is 2.5 per cent for 1997.
20. Underlying inflation (RPI ex MIPS) rose to 3.0 per cent
in July from 2.7 per cent in June, but fell back to 2.8 per
cent in August. The expectations are that it will be
successfully contained by the inflation target and the new
monetary policy procedures. In the short term, headline
inflation may run above the underlying rate, and has now risen
to 3.5 per cent in August. Nevertheless, in the
circumstances, the government maintains that it cannot afford
to let the headline rate influence this round of pay
settlements when the prospects for the underlying rate are so
good.
Pay review body groups
21. In considering their recommendations, the pay review
bodies should take a particularly rigorous approach to the
issue of affordability within existing plans.
22. Retention and recruitment remain good. There may be some
specific shortages in some areas, but the particular
difficulties are not necessarily pay-related. Generally, the
skill shortages that may currently be putting pressure on pay
in some parts of the private sector do not seem to be
affecting the public sector. There are no indications that
any general across-the-board action on pay is necessary on
this account.
23. The review bodies' main policy recommendations for April
1997 were accepted but their introduction was staged for all
groups, for the second year running in most cases. The 1997
recommendations averaged some 3.3 per cent. This was
considered high, and difficult to meet from existing plans
without squeezing services. The settlements were staged by
paying 2 per cent from April 1997 and the balance from
December 1997.
24. Staging reduces the initial costs of a pay settlement,
but thereafter the recommendations are paid in full. This
creates an increase in pay costs in the second year that must
be taken into account in assessing available resources.
25. When the staging has been completed in December, all
groups will be receiving the full amounts recommended for the
1997 pay settlement, averaging 3.3 per cent. Those groups
whose settlement was staged in 1996 will also have similarly
received the full increase recommended for that year,
averaging some 4 per cent.
26. For both years, these averages are high in relation to
other public sector settlements. In 1996 most other
settlements ranged from below 3 per cent up to around 3 1/2
per cent. In 1997, public sector settlements have generally
been lower in the range 2 1/2 to 3 1/4 per cent.
27. Similarly, over the longer term, pay settlements for the
review body groups have tended to be at the top and of the
range of public sector pay settlements.
Conclusion
28. The Government asks the pay review bodies this year to
make recommendations that recognise the need for pay
settlements to be affordable within Departments' existing
spending plans, and to give this priority over other
considerations.
29. In addition, pay increases should be low next year so
that Departments can afford to maintain the delivery of
services.
30. Recommendations should also reflect the particular
circumstances of the remit groups, on a case-by-case basis,
addressing specific issues as necessary.
HM TREASURY
September 1997
[1] The three separated segments on the right of the chart
cover employees whose pay is determined by the Pay Review
Bodies. The NHS employees covered by RBs are doctors and
dentists, nurses, and professions allied to medicine. Other
NHS employees are included in the "Other Public Sector" group.