Belfast Telegraph

Why we risk demonising the Chancellor


By John Simpson

The Chancellor of the Exchequer, Philip Hammond, is at risk of being demonised on flawed criticism. He has tried to explain the rationale for public sector pay policy drawing on valid evidence that rates of pay in the public sector have not, on average, fallen behind the rates of pay in the private sector.

Across the whole UK economy, average public sector earnings in 2005 (before the financial and house price crisis) were 14% higher than in the private sector.

In 2016 public sector earnings were 13% higher. The one percentage point difference is not evidence of a major shift in relativities.

Overall public sector earnings tend to show public sector employees do better than employees in the private sector as the occupational structure of the public sector favours those with enhanced occupational qualifications.

The easy and popular concern is that public sector employees have had a period of pay restraint, typically described as a cap of 1% each year, which has left many lower paid employees coping with a shrinking standard of living.

Inflation in recent years has been low but over a decade average earnings increases have been even lower.

The key to understanding the debate on public sector earnings changes is to note that in the UK in the period from 2008 to 2015 both public sector earnings and private sector earnings lagged behind inflation by about 4% and that private sector earnings lagged even more than those in the public sector.

If there is a message coming from the Chancellor it is not that public sector employees have been selectively disadvantaged.

It is that the whole UK economy has performed poorly and that this raises questions about why poor productivity and earnings have led to falls in real incomes across the whole economy.

In Northern Ireland the same trends are in evidence but with rather less reassurance for private sector employees.

Over the last 20 years, average earnings for full-time employees in the public sector in Northern Ireland have generally moved almost in line with the UK public sector.

In the last five years Northern Ireland public sector employees, on average, have done fractionally better than the public sector in Great Britain.

Parity in changes in public sector earnings between Northern Ireland and the UK average is strongly in evidence.

The debate provoked by the Chancellor centres on how public sector earnings compare, over a period of years, with private sector earnings.

Locally, this debate extends to how the private sector in NI is changing compared to the comparable UK private sector figures.

One difficult aspect of the comparison tends to cause unfair judgements to be made.

Many public sector employees benefit from Government financial support paid for defined benefit pension schemes.

Compared to the private sector, where defined benefit pension schemes are now a dwindling feature (because they are much less affordable in today's financial markets), the continuation of inflation protected pension schemes linked to earnings is a serious difference in earnings comparisons.

The Chancellor, as did his predecessors, continues to criticise this feature in a way that would apply to NI as well as the UK.

Despite the period of Government imposed public sector spending reductions - the austerity programme - average public sector earnings in NI have been increasing faster than private sector earnings.

Some features of pay and earnings in NI show unfavourable trends for the performance of the private sector.

Ten years ago, average private sector earnings in NI were 30% lower than in the public sector. In 2016, the difference was still 30%.

These comparisons are easier to make than offering a prescription for the delivery of improvements. Philip Hammond is searching for a healthier policy debate which also needs to take account of what is happening in the private sector.

The tension is about much more than the public sector 1% pay cap.

Belfast Telegraph