The Week 14 July 2023

Plastered across the headlines this week is the debate over the public sector pay deal.

Yesterday, the Prime Minister confirmed he would accept all of the recommendations from the independent pay review bodies in an attempt to put an end to strike action, having concluded that this wouldn’t become a serious factor in driving inflation after all. While teachers seem placated by the deal, it appears police officers and junior doctors remain unsettled.

The cost of the pay rises amounts to approximately £2 billion this year, not including the wage settlements agreed in March. The Government has made clear these pay rises will not be funded through taxes or borrowing… so where is the money going to come from?

An estimated £1 billion will be raised through increasing the cost of work and study visas and increasing the migrant health surcharge, aligning comfortably with Government’s interest in striking a tough stance on immigration. But this leaves a further £1 billion to be filled by “reprioritisation” and “efficiencies”. What does this mean in practice? No.10 has provided examples, neither of which involve a direct cut to public services: a recruitment freeze on civil servants in the Ministry of Defence, and a reduction in civil service traineeships in the Department for Education.

Once it gets past reallocation of underspends, government departments will start looking inward to tighten-up and identify savings in order to meet at least part of that £1 billion bill. We at Reform agree that this is possible, but the fact that raiding Whitehall’s pantry has become a cliché when the system needs cash rings alarm bells for how central government is managed. If there really are this many efficiency savings to be gained from trimming the machinery of government, what does that say about Whitehall’s strategic planning in the first place? Look out for our take in some upcoming research on establishing a genuine efficiency mindset within the system.

If Whitehall efficiencies don’t cover the costs, the stark reality of these allocations will mean government departments choosing between salary or finding savings in service provision. This will be a challenging trade-off to navigate, particularly while backlogs grow and the NHS waiting list reaches a record 7.47 million.

Few would question the importance of a productive, motivated workforce to the performance of our public services, and research generally demonstrates a link between compensation and productivity. If the alternative is strikes, a non-striking workforce is more productive than a striking one. But if these deals don’t work as well for doctors as they do for teachers, Government could still find itself making cuts to pay for wage increases even as the strikes roll on.

Onto our recommended read of the week…

…and we’re sticking with questions about the public finances. Yesterday, the Office for Budget Responsibility (known for its economic analysis that accompanies budgets), published its latest “Fiscal risks and sustainability” report.

The headline, unsurprisingly, is that economic shocks of the last few years — Covid-19, the energy and cost-of-living crisis, and still-rising interest rates — have taken their toll on the resilience of the public finances. We’re told that debt has risen threefold since the start of the decade, to over 100% of GDP (its highest level since the mid-1940s), and that the cost of servicing this debt is the highest it has been since the late 1980s.

On top of this, long-term trends predating the pandemic — including growing numbers of working-age people who are economically inactive due to poor health, and the costs of decarbonising the economy — make clear that putting the public finances on a more sustainable footing is as much about addressing these deep-seated structural issues as any short-term decision around tax-and-spend.

Take economic inactivity due to poor health, for example. The majority of this group (of 2.6 million people) have been out of work since before the pandemic. Yet only a small number are waiting for specific, elective treatment from the NHS — OBR modelling suggests that even halving NHS wait lists would only reduce inactivity by 25,000. Many have progressive illnesses, for which treatment is “unlikely to have a clear impact on work capability”, and which may well mean different kinds of support (including non-medical support) will be needed.

This is an important read which drives home the link between the public sector’s ability to respond to structural issues now, and how affordable it will be in future… if we are to avoid debt reaching 310% of GDP by the 2070s, per the OBR’s central forecast.