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She said: “You might talk about a gap, or you might talk about a differential, but to talk about a ‘premium’, as if people are doing the same thing but are just getting extra pay for it, is very misconceived and actually mischievous. One of the fi ndings we had discussed in some depth was that in fact there are many factors which mean we are not comparing like-for-like.”

In her opinion, the way the Treasury uses the term glances over crucial differences between roles and contexts in the two sectors, such as the size of organisations and type of work. The report says: “The relatively simple comparisons used by the Treasury are synonymous to comparing ‘apples with oranges’: and strangely or not, this is a habitual fallacy of ‘pop’ economics and statistics.”

Managing the bill

Lurking behind the controversial regional pay proposals is, of course, the Government’s over- riding desire to cut the defi cit; but it seems the Treasury has done little to prove the plans would even save money.

Kersley found that the Government’s research didn’t account for many factors used to accurately calculate Government savings. Far from saving money, the move appeared to only drive up costs.

She told PSE: “Yes, you are making a saving on the public sector wage bill. But when you then take account of the fact that you are getting less tax revenue because people are earning less, and if you’re not making that up by an equivalent number of private sector jobs being created at a decent wage that will yield that tax benefi t, then in terms of public fi nances, what we see in the wash is that any savings you make are going to be quite small relative to the economic impacts that you are having.”

Kersley pointed out that her preliminary research was not able to account for HR and administrative costs incurred by the Government’s plans. Based on these limitations, her report tried to downplay expenditure and keep estimates conservative, especially while there is still more sophisticated research to be done on the policy’s full impact.

Despite not factoring in these costs, the outlook depicted by the nef report was bleak if such cuts were to take place. But even using a model adhering to the Government’s ‘crowding out’ theory, where public sector pay cuts are met by positive private sector response in pay and hiring more people, the net loss to GDP was

i More stories like this at: economy-and-infastructure

still a massive £2.7bn.

The estimates of the counter-model increased the economic cost signifi cantly. Presuming that the ‘crowding out’ theory – which the nef report questions the relevance of in the fi rst place – would not practically apply, Kersley’s research estimated that costs to GDP would hit £9.7bn.

“We didn’t have the resources to do that, but it would be something to add in, which is why we conclude that these costs are likely to be suffi ciently high to wipe out any savings to the public purse.”

‘Really troubling’

Concern was raised about the balance of studies used by the Treasury and their relevance as a basis for policy-making.

The report says ‘crowding out’, which states that excess public sector pay takes investment away from the private sector and drives up costs to the detriment of market competition, is applied in Treasury analyses without due account of the economic climate, and that even its creator Milton Friedman had “doubted that it had any validity in an economic downturn”.

Kersley told us: “They discussed in some depth the problem of ‘crowding out’, which they tried to describe. They very overtly didn’t talk at all about the ‘crowding in’ issue. So there was nothing of that in that evidence. It was very much the case that it wasn’t balanced. It was putting forward a particular line of argument, not looking at it in the round, which you might expect to see.”

In addition to this, Kersley found that of the studies used by the Treasury – “only a handful” were used anyway – a lot of emphasis was placed on a study with signifi cantly out-of- date research, ‘The Pattern and Evolution of Geographic Wage Differentials in the Public and Private Sector in Great Britain’, which only has data up to 2001. She found it worrying that the Government was

public sector executive Jul/Aug 12 | 19

basing policy-making on out-dated material.

She said: “I think it is really troubling when it’s going to have such an impact on a number of people, not just the public sector workers, but on the wider economy and people who work in it.”

Kersley was keen to point out to PSE that the pay cuts would disproportionately affect lower- paid public sector jobs, largely occupied by women, and increase the number of people relying on benefi ts to supplement their pay packages to make ends meet. She warned that the Government should avoid “storing up trouble down the line” by not taking into account the “knock-on” effects of pay cuts and emphasised that this was a major reason why the plans were so ineffi cient.

Kersley and her team at nef were led to conclude that more work needed to be done to outline the full impact of the proposal, though the economic viability of regional pay seems doubtful in the light of her preliminary fi ndings.


The report is at publications/the-economic-impact-of-local- and-regional-pay-in-the-public-sector

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