News / Time to pay up?

 Slowly, inexorably, the pressure to lift the 1% cap on public sector pay rises has increased and now, it seems, the pressure has paid off. It may be a sign of a weakened government showing it is in listening mode. It may even be hoping to avoid the worst of the predicted impact of the exit from the European Union on the public sector workforce. Managers will hope that the government also loosens the purse strings and fully fund any award.

At this year’s general election, both Labour and Liberal Democrats pledged to remove the cap and, soon after, some of Theresa May’s ministers hinted it was under review. In September, nurses marched in Westminster as part of their Scrap the cap campaign (pictured). Later in the month, the government lifted the cap for police and prison officers. Police officers were given a 1% pay rise plus a further non-consolidated 1% for 2017/18, while their prison colleagues were handed a 1.7% rise.

However, worryingly for the NHS and other parts of the public sector, both of these increases must be funded from existing budgets. While the percentages sound small, the cost could add millions to the NHS pay bill. 

Wage restraint

The public sector pay cap was introduced in 2013 following a two-year pay freeze. In the NHS it is seen as one of the main single contributors to meeting the shortfall between available funds and spending due to demand and other inflationary pressures (£3.3bn of the estimated £22bn gap, according to the Department of Health, NHS England and NHS Improvement). It is frequently claimed that each 1% rise costs the NHS £500m. Without further funding the service faces another significant headache.

The health unions have been campaigning for some time to lift the cap and, on seeing it all but lifted, they responded strongly. 

In a letter to chancellor Philip Hammond, 14 unions, including Unison, the Royal College of Nursing and Managers in Partnership, called for a 3.9% rise plus an extra £800 to make up for lost earnings during the years of austerity-driven freezes and caps. The unions’ pay demand would match inflation – the September retail price index stood at 3.9%.

Royal College of Nursing chief executive and general secretary Janet Davies said: ‘If the government gives nurses the same deal as the police, it would still be a real-terms pay cut. Nursing staff must be given a pay rise that matches inflation, with an additional consolidated lump sum that begins to make up for the years of lost pay.’

Managers in Partnership chief executive Jon Restell said: ‘Managers in the NHS know how the cap has hit their own pay, and that of their staff. They see the damage it’s doing to NHS services by making it harder and harder to recruit and keep good staff. Patients need the best staff, and our staff need a fair pay rise.’

Crucially, the unions urged the chancellor to find the money to fund the pay rise in full. 

Ms Davies added: ‘It must be fully funded and not force the NHS to cut services or jobs to pay for it. When ministers hold pay down, it drives too many nurses out of the NHS. ‘

Niall Dickson, the NHS Confederation’s chief executive, said the unions’ demand was not a surprise. ‘We have made clear that we do not believe that the 1% pay cap is sustainable and that our members have mounting concern about both recruitment and retention of vital frontline staff. Staff morale is also a serious issue, and while pay is by no means the only or even the critical issue, it is clearly important that those who deliver care feel valued and adequately rewarded,’ he said.

In the HFMA’s recent NHS financial temperature check, finance directors expressed anxiety about current and upcoming workforce issues. They noted the difficulty recruiting and retaining clinical staff and were worried about the impact of exiting the EU.

Workforce is now the leading challenge for many organisations, Mr Dickson said. ‘We have also made it clear that any attempt by the government to make the service meet the cost of any pay increase would be a disaster – the pressures on NHS organisations are unprecedented and funding has been at historically low levels.’

He added: ‘Current plans for funding health and care services over the next two years are already unrealistic and any further cost on the pay bill must be matched with additional funds. We recognise that extra money for healthcare has to come from somewhere, but we believe there would be public support for making this a priority.’

The unions say NHS staff have taken a 15% pay cut in real terms since 2010, but how does public sector pay compare with the private sector? 

A recent IFS briefing note said that the lowest paid and ‘lower educated’ public sector workers have average wages higher than those in the private sector. However, the better paid, ‘higher educated’ public sector workers have fared worse compared with the private sector. 

On average, it argued, there was a better argument for increasing the pay of this higher educated group of public sector staff. But it’s not hard to see why increasing higher paid staff salaries would be difficult for politicians.

Jonathan Cribb, a senior research economist at the IFS, and author of the briefing note, said if pay rises in the public sector remained pegged at 1%, these staff would fall increasingly behind their private sector counterparts. The knock-on effect would be to make recruitment and retention more difficult.

‘The government is considering lifting the public sector pay cap for at least some workers. If it decides to maintain the 1% cap, we should expect increasing difficulties in recruiting, retaining and motivating high-quality public sector staff, reducing the quality and quantity of public services. 

He added: ‘But increasing pay for these workers implies substantial extra costs to public sector employers. The Treasury could provide extra funds for this by raising taxes, cutting other spending or borrowing more. 

‘Asking the NHS, for example, to fund higher pay increases from within existing budgets would be very challenging.’

Complex picture

While 1% may have been the headline figure for pay rises since 2013, the reality is a little more complex than an across-the-board increase. Staff at the top of their pay band have received the 1% rise, but those lower down the band could also have been eligible for increments.

Indeed, in its 2017 report, the NHS Pay Review Body said more than half of NHS staff in England (54%) were due to receive pay increments averaging between 3% and 4% in 2016/17 on top of their 1% pay award. 

Incremental pay contributes to pay drift – changes in the cost per full-time employee due to movements in the composition of staff by seniority or group. NHS bodies also face pressure from pension contributions and new costs, such as the apprenticeship levy. Staff and unions would point out that incremental progression under Agenda for Change aims to reward experience and skills and cannot act as a substitute for an annual cost of living pay rise. 

In England, the Department of Health told the review body that in recent years pay drift had the effect of bringing down the overall pay bill – due to an increase in less senior staff. In 2015/16 pay drift per full-time equivalent was -0.2%. However, this was more than offset by the headline pay award, which added 0.5% to the overall pay bill and employment of additional staff, which added 2%, producing an aggregate pay bill growth of 2.3%. Employers have argued that the negative figure related to high staff turnover.

These figures do not include the cost of agency staff. The NHS in England is reducing agency spend – in the first quarter of 2017/18 agency spending was £169m (22%) lower than quarter one in 2016/17. For the first time in recent years, providers underspent on their year-to-date plan. While some of this reduction in spending was due to efforts to hold down fees and rates paid for agency staff, some was due to shifting workers to bank and substantive roles. 

Additional substantive staff, as noted above, mean the pay bill will grow and was the biggest contributor to the overall pay costs increase in 2014/15 and 2015/16 (2% in each year).

The Department of Health has consistently argued that pay restraint is a key element in ensuring the NHS remains financially sustainable. It had planned to fund an average 1% award up to and including 2019/20. 

However, strengthening public opinion about the need to remove the cap on public sector pay, a weakened administration and worries about the NHS workforce are pushing the government away from its established pay policy. 

The award for police and prison officers was the first sign of that and all eyes will be on the chancellor to confirm the cap has been removed – perhaps at the Conservative conference at the beginning of October or in the Budget on 22 November. But will he produce the funding to match any pay rise?