UK policymakers have been warned that the public sector pay restraint could leave some government bodies struggling to recruit staff and retain the ones they hire, potentially driving up demand for contractors.
According to the Institute for Fiscal Studies (IFS), pay predictions set out by the Office for Budget Responsibility in the Autumn Statement earlier this month suggested that public sector wages would fall by eight percentage points between 2012/13 and 2018/19.
The figures mean that the public sector pay premium - which grew to 20 per cent following the financial crisis - will return to pre-recession levels this year, before falling further.
IFS report authors Jonathan Cribb and Luke Sibieta said: "If the current forecasts are correct and private sector earnings growth continues to be higher than public sector earnings, some public sector employers may well find it increasingly difficult to retain and recruit high-quality workers."
Chancellor George Osborne introduced a two-year public sector pay freeze as part of his deficit reduction plan in 2011/12 and 2012/13. Since April, annual increases have been limited to one per cent, while Mr Osborne said in this year's Autumn Statement that he was considering ways to continue consolidation beyond the end of the restrictions in 2015/16.
The IFS authors said that both the government and public sector pay review bodies should pay considerable attention to any suggestions that the public sector is facing difficulties in recruiting and retaining high-quality staff.
When public sector pay was forecast to return to its pre-crisis level relative to private sector pay 2015/16, reducing salaries may have been a relatively simple method of reducing departmental spending, the authors suggested. However, the choices for government official has become more difficult.
Mr Cribb and Mr Sibieta said: "If that leads the government to want to mitigate the squeeze in public sector pay but to keep workforce costs as planned it would have to absorb even more cuts to the size of the workforce, beyond the cuts of more than 1.1 million already planned between 2010/11 and 2018/19."
The average raw public pay premium is now expected to fall below 15 per cent within the next two years. When a similar low level was seen in the early 2000s, some parts of the public sector had difficulties and retaining staff and this could be repeated.
IFS analysts went on to suggest that both the government and pay-review bodies need to pay "great attention" to indicators of whether the public sector is currently facing any difficulties in recruiting and retaining high-quality staff, before deciding on settlements in light of such evidence.
The body argued that while squeezing public sector wages may have been a relatively simple way for the government to cut departmental spending, cutting expenditure is likely to get more difficult as time progresses.
I am a chartered tax advisor with a specialism in the freelance contractor sector advising contractors on how to structure their affairs and recruitment businesses and end hirers on the effective…
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