Government's local pay plans could cost local economies almost £10 billion a year

There is no evidence that the pay of teachers, nurses and dinner ladies is preventing local firms from hiring staff, and government plans to introduce regional pay rates for public servants could cost the economy almost £10 billion a year, according to a report published by the TUC today (Monday).

Concerned that the government has yet to undertake any serious research into the economic impact of its proposals for the introduction of local or regional public sector pay, the TUC recently commissioned the New Economics Foundation (nef) to analyse ministers' proposals. The nef researchers conducted an in-depth analysis of the arguments put forward by the government and found little evidence to support its position.

Nef also looked into the economic impact and the number of jobs that might be created - or lost - if local pay was introduced for schools, hospitals and other public sector employers.

To examine the likely economic impact of the government's local pay proposals, nef set out to explore a number of scenarios. One approach assumed that that the government is wrong and that there is no 'crowding out' of the private sector by public sector pay.

Nef concluded that with this 'worst' case scenario where the pay of millions of public servants who live beyond London and the South East is brought down to private sector levels, as many as 110,000 net jobs could be lost across England and Wales, and the cost to local economies would be a huge £9.7 billion a year.

Even on the 'best' case scenario for ministers, where nef modelling assumed that the government is right and the pay of public servants is preventing private sector firms from recruiting because they are unable to match public sector salaries, the introduction of local pay rates for public servants would only see the creation of a mere 11,000 net jobs across England and Wales, the report found.

Yet this approach would still come at a price and would mean local economies taking a hit to the tune of £2.7 billion a year as civil servants, refuse collectors and other local public sector workers find their spending power further diminished, says the TUC.

Commenting on the report, TUC General Secretary Brendan Barber said: 'Quite apart from the huge hit that public sector workers would have to take in their pockets if pay in parts of the UK is held down to 'allow' the private sector to catch up, this report shows that the move would also prove hugely damaging to local economies.

'Despite the concerns being voiced by MPs in the parts of the UK most likely to be affected by the introduction of local pay rates, the government has so far refused to rule out this move that would hit public sector workers and their families - who are already feeling the financial pinch as they suffer the effects of a lengthy pay freeze - very hard.

'We hope that our report - combined with the findings of the three pay review bodies due to report back to the government this week - will prove to be the final nail in the coffin for these discredited proposals.'

Helen Kersley, Head of Valuing What Matters at nef said: 'The research finds no economic case for regional pay variations. Our research finds the government's proposals are based on flawed assumptions that are not borne out in reality.

'Cutting the wages of public sector workers is a high stakes gamble from which there will be no winners. Even in the very best case where the private sector creates more jobs, the economy would be substantially worse off overall.

'Proponents of this policy must look again at the potential implications to avoid creating further harm in a fragile economic period.'

Since the Chancellor announced in last year's Autumn Statement that the government was to explore whether a system of local pay for public sector workers might help businesses in the private sector take on more staff, a growing number of coalition MPs in 'low-pay' areas of the UK - such as the North and South West - have begun to voice concerns about what such a move might mean for their local economies and communities.