Pay rises for public sector despite the recession

Published by Rebecca Atkinson on 18 February 2010.
Last updated on 18 February 2010

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Private sector workers have suffered a pay freeze over the past year - but their counterparts in the public sector enjoyed an inflation-busting 3.7% rise, according to official figures.

Private sector pay (including bonuses) failed to grow at all over 2009, with average earnings unchanged at £448 a week. While many private firms were forced to cut costs to stave off bankruptcy last year, in the public sector the average total pay rose to £457 per week.

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With retail price inflation - the measure generally used to determine pay rises - rising 2.4% in the year to December, this means that (in real terms) private sector workers actually suffered a pay cut last year – whereas the public sector enjoyed a real-time hike.

In total, average wages rose by 0.8% over the three months to December 2009 compared with a year earlier. However, before the recession, annual growth in pay averaged 4.3%, according to Charles Davis, senior economist at the Centre for Economic Business Research.

The great divide in the labour market experience of UK workers piles further pressure on chancellor Alistair Darling to address the balance in his forthcoming Budget - and slash public sector pay in a bid to reduce Britain’s £178 billion deficit.

In his pre-Budget report last December, Daling did pledge to cap contributions by the state to public sector pensions by 2012, saving around £1 billion a year. Public sector employees, especially those earning more than £100,000, would in turn contribute more.

Dealing with the deficit

Labour’s current plan is to halve the budget deficit over four years, while the Conservative Party has called for faster and deeper cuts - though details of how it would achieve this remain vague.

“The gap between public and private sector wages is unacceptably large, reinforcing the need for a freeze in the overall public sector wage bill, which will be a key measure in reducing Britain’s unsustainable budget deficit,” said David Kern, chief economist at the British Chambers of Commerce.

Other official figures show the public sector had a current budget surplus of £1.2 billion in January 2010, but net borrowing of £4.3 billion.

At the end of January, net debt was £848.5 billion - equivalent to 59.9% of gross domestic product.

This is the first January deficit since at least 1993, according to Jonathan Loynes, chief European economist at Capital Economics. He describes the figures as "truly dreadful".

"We had expected the normal January surplus to be smaller than last year’s, but the outturn of a £4.3 billion deficit has dashed any hopes that the worsening trend in the public finances might finally be easing a bit," Loynes adds.

It is now possible that full-year borrowing figure could hit around £180 billion, which is around £10 billion higher than Darling's pre-Budget Report forecast of £170 billon.

Loynes says: "For now, the markets and credit rating agencies seem prepared not to put the UK in the same category as the fiscally-challenged eurozone economies like Greece.

"But with the budget deficit heading towards 13% of gross domestic product this year, and perhaps exceeding that of Greece, it is clear that a more credible plan to restore the public finances to health will be required shortly after the general election to keep the markets and rating agencies at bay."

And Mark Bolsom, head of the UK trading desk at Travelex, says: “This figure will only endorse the argument for full-scale spending cuts in the public sector and is quite likely to have negative consequences for [economic] growth. Unfortunately, we are about to undergo a period of fiscal austerity, whoever wins the general election.”
 

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