Pay, pensions & pressures on public services
Good afternoon everyone and welcome to this event as part of the ESRC Festival of Social Science. My name is Ben Zaranko, and I'm delighted to be sharing this event today on a really important and increasingly topical issue of our public services and how they're fairing in the current high-inflation environment, what recent announcements on pay mean for those services, and what it means for the new prime minister and the new government. In his first speech today, Prime Minister Rishi Sunak reiterated his commitment to the government's manifesto commitments back in 2019 on investing in our health service, our police, our armed forces, our schools, our commitment to levelling up. But he also reiterated the commitment to getting a grip on government debts. I think squaring that circle and trying to balance those competing priorities will be one of the central economic challenges he faces, and that's why today's presentations will be so timely and hopefully really important background information for those interested in those issues. Today we'll have three presentations. First from my colleague Bee Boileau on the public spending outlook and how that is changing in light of recent pay awards. Colleague Lawrence O'Brien will then turn to how pay in the public sector compares to the private sector, how that's been changing over time and what happens if we take into account public sector pensions. Then Luke Sibieta will zoom in on schools, in particular, and use that as almost a case study, which is a microcosm of the broader issue which we're discussing here. Schools, of course, not only a big chunk of spending, but potentially central to any government seeking to boost growth potential of the UK economy. Now, if you'd like to ask questions, you can find a link to Slido. If you have questions there and vote up any questions which you'd like to look up, would like to see answered, we'll hopefully have plenty of time at the end. With that, I'll hand over to Bee and we'll see you for the Q&A shortly.
Thank you, Ben. I'll start by talking about decisions that the new chancellor faces on the public sector pay and the situation in terms of spending. First, the current situation in terms of public sector pay. In last October, spending review departmental budgets were fixed in cash tons over the next three years. This was a period in which inflation was expected to average 2.7 percent per year. If I just assumed that pay awards for public sector workers would be in the region of three percent. The double-digit inflation experience this financial year was unpredicted and so unbudgeted for. This July, the government recognised that three percent would be insufficient in this inflationary environment and so with the public sector employees a pay rise of five percent on average. We estimate that these extra two percentage points on pay compared to the three percent pay awards budgeted for will increase staffing costs by around five billion pounds this year alone. We can break down this course. It's got a sense of which sectors will face the majority of these costs. We do this based on the fraction of general government employment accounted for by each sector. This table shows the overall additional costs. As I said, there's almost five billion pounds but the NHS and education sectors will face more than half of the costs of the awards and that is a result of the fact that they account for so much of general government employment. So far, departments have not been compensated for the additional costs. It's going to be especially difficult for departments to meet them given the general inflationary environment manifesting and things like rising energy prices. For IFS work, we estimate that the real terms generosity of departmental spending plans as compared to when they were laid out in October last year is done five billion this year, 14 billion in the next year, and 23 billion in the final year covered by spending review. Even these higher than budgeted for awards may be inspection of it to prevent concerns about recruitment and retention in the public sector or to prevent widespread industrial action. Even five percent pay awards represent a real terms cuts public sector pay of around five percent given the inflation is around some sense. They're also expected to run slightly below private sets of settlements this year. This will mean that the chancellor faces a range of trade-offs to overpay employments and spending cuts but if this year is over, the whole period can provide the spending review. I'm going to start by showing you one of those trade-offs this financial year. Here I'm going to assume for simplicity that the departments keep their staff in budget specs to additional pay awards, and that's entirely through changes to public sector employment. This is obviously a simplification and it's true that departments might be able to find savings elsewhere in their budgets. But as I said, given the inflationary environments, it's likely that such headroom, if it's excess, will be shrinking and so we think this is broadly accurate. On the x-axis here I've got the average pay awards offered to public sector workers. On the y-axis, I've got the necessary change to public sector employment that would be necessary to afford various different levels of pay awards. I'm going to start off by showing you the trade-off under the assumption set outs and lost up to its pending degree so assuming that the government offers no top-ups. As you can see first it's offering pay awards three percent on average, is affordable without any changes to public sector employment. This is what was budgeted for as I said it last October. Offering five percent pay awards on average, this was awarded this July though, requires cuts to public sector employment with more than 100,000 of workers without top-ups from the governments and offering inflation matching pair awards rather than five percent of around 10.5 percent, which require cuts to public sector employment of almost 400,000 workers this year without additional money from the government. Now looking at the situation of payables topped up by 4.8 billion, as you can see here, a pair awards of five percent is now affordable with no change to public sector employment. But looking to the right, you can see that ordering awards in a pay awards of 10.5 percent, so requires heavy cuts to public sector employment. Indeed it's only with, as this blue line shows, top-ups have 17.9 billion pounds this year, the inflation-matching top-ups would be affordable with no changes to employment. These trade-offs are a problem for this year alone. Last October, spending review sets spending allocations for the next three years and so there'll be similar trade-offs in the final year covered by spending review. I'm going to show you one of those trade-offs. This graph is slightly different from the x-axis here you've got the top pops up by the government in 2024-2025, all the necessary change in spending, and on the y-axis again, you've got the necessary change in public sector employment. I'm going to illustrate the situation on the two illustrative pods for public sector pay. First, I'm going to show you the situation if the five percent pay award this year, it's held, and then public sector pay is kept constant in real-time so increased with inflation in 2023-2024 and 2024-2025. This is what this blue line shows. As you can see, to follow this path to pay awards and avoid any headcount cuts in the final year, 10.6 billion pounds would be required in the final year in order to avoid that. I've no top episodes in this pay award path is followed that would need to be at 220,000 cuts to public sector employment with no top-up. If instead as units of inflation-matching matching pay awards were set up in this financial year then the next two pay awards are also inflation matching 25 billion pounds would be required in the final units to avoid heads count cuts. Alternatively, that would need to be a 500,000 cuts to public sector headcount without sucking up departmental funding. This all implies that the chance to face is a hard choice between funding additional pay awards or accepting a sharp deterioration in the quality of public services. This deterioration could either come through increasing difficulty with recruitment and retention in the public sector if pay award was just not offered, or it could come through shortcuts to employment since I've illustrated if the pay awards were offered, but departments not offered any more money in something. Delivering previous public service objectives, such as carrying the NHS backlog or levelling up premier education already looked challenging lost also when spending reviews were set out and it now look structurally impossible. It's even possible that some departmental budgets will be reduced rather than increased as also. This points toward one of the longer-term policy issues that we discussed in our green budget chapter, that has to do with reforming the standard framework. As I've discussed, public sector pay is out on an annual basis, while departmental budgets are on a multi-year basis. The multi-year plans, health departments plan over the slightly longer term, but they also make concepts responsive when conditions rapidly change as we saw happen this financial year, with inflation going much higher than was predicted what we budgeted for. Moving public sector pay to a longer-time horizon to account for this, with increased problems with public sector pay and flexibility and make it less competitive and comparisons in private sector and spending was fixed over just a single year to prevent this lack of responsiveness to changing conditions, it might stop departments from being able to climb into the future. A possible solution we set out to notch out is to continue the current planning timelines but to create a framework where we automatically reassess and reopen settlements in exceptional circumstances, such as when payer sets above pre-specified limits. As shown public sector pay needs to be higher than was assumed last October when departmental funding were set and shown that this can't be accommodated within those spending tonnes without cost to public sector headcount. Either spending plans must be topped up by the new chancellor, or it must be accepted that the quality of public services will deteriorate. A five percent award announced so far this year would like to run below private-sector pay supplements. I'll pass on to my colleague Lawrence. We'll talk in more detail about how the private sector compares to the public sector.
Great. Thanks, Bee. As much Bee just said the recruitment and retention of public sector workers is going to be a key issue for the government in the medium term. One thing that's going to be crucial in timing this is how much public sector workers are paid, and in particular, how this compares to pay in the private sector. That's what I'm going to be looking at in this presentation. Now, of course, just one caveat to keep in mind is that pay isn't the only thing that matters when deciding where to work. Things such as how stressful the job is to whether you get a company car, too many other things can also have an impact. The pay is obviously going to be the key determinant. To start with, in this graph, I'm showing you the public pay differential all the way back to 1993, '94. Just to define what this says is I'm going to be talking about the public pay differential a lot throughout this presentation. This is the percentage difference in pay in the public sector relative to the private sector. Positive public pay differential means the public sector workers are getting paid more than private sector workers. A negative one means that public sector workers are getting paid less. In 2021, '22, we estimate the public pay differential at about seven percent. This means the average hourly pay in the public sector is seven percent higher than average hourly pay in the private sector. Although this is a positive number, we can see that overall we find a decreasing trend. Especially since 2011, 2012 under the public pay differential is at its lowest point in 2021, 2022 since at least the early '990s.
Now this is what happens when we can compare average pay in the two sectors. This might not give a good indication of the relative generosity or the relative pay in the two sectors for similar workers, and that's because the two sectors differ in composition. In particular, the workforce and the public sector tends on average to be more highly educated, tends to be older, and it tends to have more experience. All of these factors would lead these public sector workers to expect to be paid more whether they work in the public or the private sector, and therefore the direct comparison between average pay that I did on the previous slide might not get a good idea of how much similar workers would expect to get paid in the two different sectors. What we're going to do is control for these differences between the two workforce, is using labour force survey data and regression analysis. This will allow us to look at the public pay differential, but otherwise similar workers and give a better idea of the outside option that workers actually face. That's what I'm going to do now in this yellow line. What we can see is that we find a lower public pay differential after controlling for things such as: sex, age, education, etc. This is because public sector workers tend to be older and tends to be more highly educated as I mentioned before. Nevertheless the trend over time is similar to the unconditional difference. We see a decrease in the public pay differential in the last decade or so reaching about zero for 2021/'22. This means that on average, similar workers in the public and private sector earn similar hourly pay. This is the average public pay differential, but how does this differ for different groups? To start with, let's look at the public pay differential across the wage distribution. I'm going to spare you all the gory details of the econometrics, but what we can see in this graph is that we estimate a positive public pay differential at the bottom of the wage distribution and a negative public pay differential at the top of the wage distribution. In other words, lower paid workers tends to be relatively better in the public sector than in the private sector. Most high paid workers tends to be relatively worse in the public sector compared to the private sector. Another way of thinking about this is that the wage distribution is more compressed in the public sector than in the private sector. Next, how does it differ for men and women? That's what I'm saying in this graph with women in purple and men in blue. While we can see a fairly similar trend over time for the two groups, we can see that in all years we estimate a higher public pay differential for women than we do with the men. I think there's two main reasons why we estimate this. The first is that women tend to be especially over-represented in lower paid occupations in the public sector. As I showed in the previous graph these lower paid occupations tend to have a higher at public pay differential. An example of this is that although almost 3/4 of teachers in the public sector are women when it comes to teaching assistance which is relatively lower paid, almost 90 percent of these are women. The secondary reason why estimate a higher public pay differential for women than for men could be that women are more likely to work part-time than men and we know from other evidence that there's a lower part-time wage penalty in the public sector than in the private sector. Finally, let's look at differences in the public pay differential for different regions of the UK. That's where we can see here for 2019-2021. The first thing we can see is that it's quiet lots of variation in this public pay differential across the UK. We estimate a negative public pay differential in the Southeast London and the East of England. Similar workers in the Southeast of England are working the public sector at about eight percent less per hour than those working in the private sector once we estimate a positive public pay differential in other regions of the UK. All this up to now has been looking at the public pay differential in terms of, hey, it doesn't set at the start. There are other things that matter when deciding where to work. Many of these things we're not going to be able to capture without analysis. One thing we can look into is differences in pensions. We think this is going to be important because public sector pension provision is much more generous on average than in the private sector. We can see that in this table here. We can see there's higher pension participation in the public sector than in the private sector and more importantly we can see that there's much higher pension participation in defined benefits schemes which tend to be more generous. We can see an illustration of this at the bottom here. Almost half of public sector workers receive an employer pension contribution worth over 20 percent of pay compared to just two percent of private sector employees. This is obviously a part of remuneration, but it's not going to be taken into account in the pay figures we showed so far. We think it's important to add on this employer pension contribution in its remuneration. Do this we're going to have to use a different data set to what we did for our previous analysis and that's because the labour force survey doesn't contain any information on pensions, instead we're going to use the annual survey of hours and earnings. To start with let's replicate our previous analysis using this new data set. We find broadly similar results and we find an average unconditional difference of about eight percent in 2021, and then once we control for things this becomes slightly negative. Now let's add on employ pension contributions. This leads to a much bigger public pay differential. The average unconditional difference becomes 20 percent, and even once we control for things we still find a positive difference of about six percent. This suggests that it really doesn't matter taking into account these employer pension contributions. How has it changed over time? It start with repeating our previous analysis. Using the new data set we find a broadly similar pattern with the public pay differential decreasing especially since 2012/2013. I'm reaching its lowest point in 2021. Once we add an employer pension contributions in the purple line we can see that this drastically increases the public pay differential in all years at the analysis. We find a similar trend though with it decreasing especially since 2013. I'm reaching its lowest point in the most recent year. Overall, the fact that we find this purple line being so much higher suggests the pays is basically more pensions heavy in the public sector. You can look at this and quantify this in a bit more detail in this graph here. What I'm showing you is the percentage of pay in each sector that is take-home pay, so pay that you receive now, versus pay that goes into your pension, either employee or employer pension contributions. Looking at 2005, we can see that about 87 percent of total remuneration was take-home pay in the public sector compared to 95 percent in the private sector. By 2012, the story was pretty similar for the private sector. We saw that take-home pay share reduced a bit in the public sector. By 2021, this is reduced even more. By this point over 20 percent of total remuneration in the public sector, on average that came in the form of deferred pay but it's pensions. This compares to just about seven or eight percent in the private sector. This leads us on to one of the longer-term policy issues that we discussed in the report we released especially around the structure of public sector remuneration. As I just showed you remuneration in the public sector is increasingly skewed towards the third pay. However in especially today, during a cost of living crisis, take-home pay might be more important to employees. For example, you can't pay your energy bills using your employer pension contributions. Now, private sector workers often can do something about this. They tend to be more likely to be in defined contribution scheme so they can reduce their employee pension contribution a bit, keep most of their employer pension contribution, and then they'll have more take-home pay which they can use to spend today. The public sector workers were defined benefit pension, they don't have such an easy option. Instead they have a binary in our decision. Either you're in your pension making those employee pension contributions, but receiving that really generous employer pension contribution or you opt out. You gain because you don't have to make those employee pension contributions and you can get more pay today, but you lose a big chunk of your total remuneration that employer pension contribution. When you're starting to see some headlines talking about this; for example this comes from Cambridge News, there's some people in hospital who've opted out of that NHS pension because of the cost of living crisis. That leads us on to a potential policy option. When we're thinking about what we could do with public sector pay, obviously many public sector employees would like the government to increase both their pay and the generosity of their pension. But as we said, there's a lot of spending precious at the moment and that might not be feasible. If we're taking the total level of remuneration as given then we could think about reducing employee pension contributions in the public sector, reducing the pension value as well, but they could also have an increase in take-home pay. This would leave total remuneration fixed, but it could prevent a rise in opt-outs. If public sector workers do prefer take-home pay to deferred pay, this could lead to an increase in public sector workers welfare at least for many of them. That's all from me. This is looking quite high level, we're looking at the public sector as a whole. I'm not going to hand over to Luke, he's going to zoom in to issues facing schools.
Kevin, can you see my screen because it seemed to be around the presentation view at the moment.
Yeah, it's not a presentation view but we can see it.
Okay. Thank you guys, that's perfect. Sorry for the slight hiccup there. I'm going to talk about the specific pressures on the example of schools, both public and public spending levels. To give an overview of the key conclusions, I always like to give the game away straight away. We know that have been large increases in teacher and support staff pay for this year average around 5 percent for teachers and maybe about 8-9 percent for support staff pay. But that's still going to be below expected levels of inflation for this year. Recently we've seen a return to growth in school spending a few, but after about a decade of decline. But that's still won't get spending the people back 2010 levels because costs are rising faster than was expected when the spending plans are set out. Looking into the future, there are a number of challenges facing schools both into total spending in terms of getting the right team since the right places. This year on overall pupil numbers of falling, which could allow for the school's budget to fall in real terms and maximum savings. So the extractor, but I'm falling pupil numbers correct, their own problems. Finally, getting teachers into the right places remains a persistent problems is both in terms of getting the right teachers with separate expertise. Those are getting, encouraging teachers to apply to schools and more deprived areas. Starting with the spending cost pressures. This year there was an increase in the school's budget around four billion pounds, which included compensation for the venue, health and social care that which has now been removed and that compensation and will be removed as well. Between 2022 and 2024, there was due to be a third arise around three billion and that was going to allow school third pupil to return to 2010 levels by 2024. But there are now a range of cost pressures acting on schools budgets, starting with energy. We estimate that 50% rising energy costs out of the past year would have increased schools cost by around 400 million. That's a really broad brush average and there's a huge amount of uncertainty around that amnion when schools contracts were, and also the age of school buildings and the extent to which they receive maintenance. The energy price caps is going to put a lid on those costs to the next six months, but there's obviously a large amount of uncertainty in their business and then what happens after six months are up? But some of the biggest cost rises will be in terms of staff cost. It's taken up around 80 percent of schools budgets. From September 2022, starting salaries of teachers went up by around nine percent, whilst pay for more experienced teachers rose by around five percent. That equates to an average rise across all teachers around 5-6 percent because most teachers are on the other parts of the pay scale. But is that still going to equate to a real terms cutting in salaries and comes all back in 10 years of cuts the real terms salary levels. This is illustrated in this graph. The green bar shows the expected real terms change, indeed a salary levels this year, and the yellow bars show how that accumulates to real-time changes back to 2010. This year, new teachers will see a small real terms increase in their salary of around 0.5-1 percent. The most teachers will see a real terms cut of 2-3 percent and most teachers are on the upper parts of the pay scale, which is labelled U1 to U3 here, and that accounts for the majority of teachers, so most teachers will be seeing a three percent cut in real terms pay this year. That comes on the back of 10 years of real terms cuts, which means that more and more experienced teachers, what we see in real terms pay cuts around 12 percent since 2010. New teacher's starting salaries will also be lower in real terms and they were in 2010 by around four percent. Cuts in the real time value of teacher pay is one of the main ways in which cuts the school spending has been delivered over the previous decade. But the increases in teacher pay are actually smaller compared with the expected increase in support staff pay. Local government employers have proposed an early 2000 pounds pay grades covered by support staff in 2022 and that's likely to equate to arise around 8-9 percent given the staff that work in schools and partly that's driven by a desire to meet cost of living increases. But it's also reflects the fact that the national living wage is increasing by seven percent this year and natural and unweighted and gradually catching up with them pay scales in the local government employers. That's naturally going to add a large amount of costs to school this year and we're certainly more than was expected. However, it's also going to create a source of problems and uncertainty, partly because it's not actually confirmed yet, so it's not being paid even though the supply is from April 2022. So a large amount will have to be paid as back pay to support staff. That isn't a great way of delivering pay levels. But also in the case of academies, it will be have to delivered in back pay off the financial year has ended. Academies financial years go from September through August each year and they thought they'd probably have tied up their budgets for the year, but now we will not have to pay back pay for around three or four months in the financial years already ended. Going onto how these cost pressures effect expected trends in spending per pupil, this graph shows the level of school spending per pupil relative to its level in 2010. As you can see during the metrics and arrows and those growth in schools then the pupil, and it reached a high point around 2010. After that, there was about nine percent fall in school. So many people 2010 and 2019. After this point, the government has announced a range of increases in school funding, which has led to return to growth. Based on the OVR's forecast for inflation back in March this year, we expect it's going to be able to return 2010 levels by 2024. But once we account for all the additional costs, that's called an interface, both in terms of teacher pay, support staff pay, energy, and as well as food prices going up. We now expect that school is going to be due will be around three percent lower in 2024 as compared with 2010 level. So this is another good example of highest spending plans on delivering as much as expected when they were set. Looking to the future and we're expecting to see a reversal of a trend that began during the last 10, 15 years. The last 10, 15 years, it's been a feature of school funding that people must have been going up year on year as bottled population. People numbers now expected to peak around 2024 and I've already been falling in primary school. We never expect there to be a five percent fall of them broke and pupils between 2025 and 2028.
Yet. On some level that could allow the government to cut the overall school's budget and plan to deliver savings exchequer that protect school spending to be in real term. For example, the government could commit to a real term fees in schools is going to hit people between 2024 and 2027. At the same time, deliver five percent fall in total spending, which could help in medium-term fiscal forecast. However, falling pupil numbers bring their own source of challenge.
When we naturally expect total budgets to be falling not only pupil numbers, but the key question is, will schools costs fall in proportion to falling pupil numbers. That's going to be a challenge in some individual schools. For example, school classes might fall from say, something like 30 or 25. But it doesn't change the cost of having a teacher in front of that class of 25. The school's budget will really be able to deliver savings if staff numbers also fall in line with pupil numbers and potentially also the number of schools. It creates a whole different challenge in generally delivering those savings. Finally, there is a persistent problem that has been true for the last 10, maybe 20, maybe 30, maybe a lot longer, is getting the right teachers to the right places. The government has been missing recruitment targets in many science, technology, and language subjects for at least the last 10 years. That's been getting worse over the last year or two. There was a brief recovery during the pandemic. But when I see government missing recruitment targets for training places in physics, technology, computing, languages, we're just going to make it hard for schools to fill vacancies in those subjects. There's also been a persistent problem about recruiting teachers, particularly math and science teachers, to the most deprived schools outside of London. As a good example of that, if we look at physics and the most deprived set of schools outside London, only 50 per cent of physics teachers in those schools have a physics degree. Getting teachers with the right level of qualifications in more deprived areas outside London is extremely challenging in the current situation. To conclude, school budgets are currently under significant pressure due to rising costs and that's coming from energy and food prices but also more importantly from unexpectedly high increase in teacher pay and support staff pay. There's going to be further financial challenges from declining pupil numbers and that's their great challenges overall. But it's also going to be differences across region with bigger falls in pupil numbers expected in London in southeast as well as in the Northeast. Getting the right teachers there in right places has been a persistent problem of at least the last 10, 20 years. That's both in terms of getting good qualified math and science and languages teachers but also trying to get high-quality teachers to apply to more deprived schools outside of London. That's where I'll stop and hand back to Ben. I'm very happy to take questions and thoughts.
Fantastic. Thank you very much. Bee, Lawrence, and Luke. We've got some questions coming in on Slido. Would encourage you to add many questions as you like. We'll get through as many as we can and to up-vote those which you like the look of. Perhaps I'll start with the most popular question on Slido, which is why should public sector workers get inflation matching pay rises if private sector workers do not? Perhaps Bee or Lawrence, one of you might talk about why that comparison with the private sector is important and whether in fact we should be offering full inflation pay awards this year and next. Maybe Bee to start.
Sure. It's true that private sector settlement it's not going to be inflation matching up although we do expect them to run higher than was awarded in the public sector this year. The private sector is also more likely to pay bonuses, which further increases the offering in the private sector. As Lawrence, discussed public pay settlements have increasingly shrunk over the last decade compared to the private sector, so it's worth thinking about what might keep pay constant in real terms. We also think is worth to have the inflation matching costs as one of the benchmarks to be considered since this is what unions have been consistently demanding. Not definite, but it could also pay off as is especially important given the tightness of the labour market right now as well. You want to add anything, Lawrence?
No, I think it's just, we have seen the difference in pay between the public and private sector. The public sector is looking increasingly less generous over the past 10 years. I think, for example, Luke highlighted there are definitely some problems to do with recruitment and retention of public sector workers or teachers in some areas at least. A good pay settlement maybe not quite inflation matching could be something that helps with this.
I think there's something worth bearing in mind, which is what the purpose of public sector pay awards ought to be? I think that the focus really should be on trying to make sure that the government has the right number of workers with the right skills in the right places to deliver on public service objectives, whether it be levelling up, clearing the backlog, whatever it happens to be. Therefore, the private sector benchmark is probably the most important one. It should be the starting point for any analysis. But of course, when you're threatened with wide-spread strike action with unions demanding much more than that, it's also useful to consider a broader range of benchmarks. But the question is a good one. There's a couple of questions here around where if the government were to increase the generosity of its pay awards and even if it doesn't, where some of these cuts and these savings might come from. I think there's an issue of the fact that higher inflation, higher energy bills, etc, means that government departments already being asked to make savings in order to meet the cost of those. There's a question here which explicitly says, if we're cutting hundreds of thousands of public sector workers, is that possible? Could departments function? Maybe, Luke, if schools were to take their share of that and if they were to be cutting back their staff and their head count, how feasible is that? What impact might it have?
That's an excellent question. I'd be certain that the department for education is currently putting in a submission to treasury talking about how disastrous that would be. But it does come to the point of school budgets over the last 10, 15 years whereby in order to make savings, they have to make cuts in staff levels. Because 80-85 percent of schools budgets is around staffing levels. Many of their staffing levels are now effectively statutory. It'd be very difficult to cut teacher levels. It's also very hard to cut support staff levels as well, because a lot of those are a product of statutory entitlement for pupils with high needs or because schools on the other hand take on the roles and privileges taken on by local authority. I think the only real way to cut staffing levels in schools would be to try and reduce the level of things that schools are doing and reduce what they do. But that brings with it its own problems and its own controversies.
Yeah, and I think if you take another big chunk of the public sector, the health service, you know, the NHS is already struggling to get it's level of activity back to where they were pre-pandemic and accordingly, it's struggling to make headway on the backlog of elective care that's built up and so it's hard to see how cutting the number of NHS staff is going to make doing things like that any easier. Now one thing that's been talked about is cutting civil service numbers. This 90,000 number flux around a lot, which is the increase in civil service more or less since Brexit. There may well be savings that can be made using silicates headcount but you got to remember that Brexit has also come with new things that civil service is responsible for. So when you've got agricultural subsidy regime in DEFRA that requires people to do it, there are being asked to do more, maybe they need more head count. I think that looks right, the main way we'd see big reductions in headcount is if there's commensurate reductions in what the government is actually doing. Lawrence has a question here about, I guess the short term versus the long term when it comes to wanting to increase people's pay in the short-term in the light of higher cost of living and recruitment difficulties and so on, versus the longer-term question of trying to ensure people have adequate savings in retirement and whether there might be pressure for DB schemes in the public sector to shift towards defined contribution. There's also a separate question which I've lost, but I think it was about the adequacy of pension saving in the two sectors, whether maybe, is there any argument that public sector workers, some of them might be over saving, some of them might be not saving enough for their retirement. I want any any thoughts on that.
Yeah. I think there's quite a lot there regarding your first point about whether it's essentially sensible for some workers to reduce their pay now and how that trades off about their retirement income in the future. I think it is a difficult it's difficult balance, I mean, we're living through quite a tough time. We are as an economy getting poorer and so we are going to have to make some of these difficult choices and I think it really depends on what, who we're looking at here. If we're looking at public sector workers, a lot of them do have pretty generous pensions so if it was possible for these pensions to be slightly less generous and for them to get a bit more take-home pay today, I think some of them would think that that'll be an option they'd quite like. Whereas if we look at in the private sector, potentially they're not getting these so generous defined benefit pensions, more on a case by case basis and I guess I can't give a one-size-fits-all answer. I think it's unlikely that you mentioned about the public sector switching away from defined benefit pensions. I think that's potentially quite unlikely. I mean, I think the public sector pensions, a lot of them are sort of pay as you go pensions or unfunded pensions so the government is receiving tax money now to pay for pensions for people, public sector workers who are retired now so it's difficult to see how they can change without drastic change to move away from that towards a defined contribution scheme because of these. I mean, there is definitely going to be some pressures if we as an economy, aren't going to be as big as we thought in the future on this pay as you go scheme, but it's difficult see. I think that's potentially not something that's such a problem yet. Regarding the literature on the adequacy of pension saving, that's quite an active research topic and again, it really depends on who you're looking at. Some IFS work that came out probably a decade ago now, which was looking at people who are approaching retirement at that point and actually it found that quite a lot of people looked like had quite a decent retirement income ahead of them, potentially a lot of them had got a house that they owned, a lot of that maybe had a quite generous defined benefit pensions if these were more common as one in the private sector in the past. But I think the story potentially has changed, at least for the private sector to some extent. We've seen for younger generations they're struggling to get on the housing ladder and defined contribution pensions have really become the norm in the private sector over the past 20, 30 years. What level of defined contribution pension, savings you need to be doing is a very open question. There's some recent research suggesting that even after automatic enrolment into pensions, people aren't potentially saving as much as they should be and this opens a question about whether we should be trying to encourage people to save more. What I would say is that maybe that is a potential good policy for the future, but it's up for debate whether a cost of being crisis is the right time to implement such a policy.
Yeah, I agree with all of that. One thing I would add is that perhaps the key barrier to moving away from DB towards DC pensions in the public sector may well be the trade unions are doing at the same time as real terms cuts to take on pay would be tricky to say the least. Luke, I wonder if we might tend to schools funding a bit more detail. There's a few quick fire questions here. One is about the symmetry of what you talked about so if you're saying that when pupil numbers fall, school costs may not fall because you still need to send number of classrooms either just fewer kids in them. Why does the opposite not apply? When pupils are rising, why do we talk about foreign funding per pupil when the cost may have stayed constant?
Yeah, it's a really good and interesting question and it reveals some of the pressures on the last few years and what's going to happen. I think it's partly kind of micro, macro thing. It's very easy to see within an individual school that if you had an extra five pupils and it doesn't increase your cost very much because you could put an extra pupil in five classes and you'll be fine and that may work when you're thinking about an individual school with a few extra pupils. When you're talking about an entire system with a million extra pupils, it's not really feasible just to plug them into extra classes, it requires extra schools, extra teachers. One of the reasons not to challenge from actually getting the money to pay for them, but it's not a controversial challenge in terms of providing this policy perspective. We want to recruit more teachers, we want to build more schools. Those are usually things that you uncontroversial with the public and uncontroversial with public sector workers. When you're in an era, when you're going to get 500,000 fewer pupils, you're going to need fewer schools overall and fewer teachers overall and that's more a challenge in terms of ensuring you do actually reduce staff members and you do actually reduce the number of schools overall. It's an asymmetric debate issue. It's uncontroversial to be talking about increasing staff members is much more controversial, much more difficult to cut staff numbers and the number of schools.
Okay, so it's almost like there's a named bill asymmetry almost acts to structurally push up spending on schools through demographic bulges and troughs almost like it's much easier to increase it than it is to cut it again afterwards. Is that first?
Absolutely. It's one of the problems with the current situation is that we really didn't need that extra schools and extra teachers over the last ten years but we might not need them for very long which is a problem for a service that's used to long-run plans. The basic problem has been, there's been a large increase in people from this very short period of time. That won't last.
Sounds like a recipe for the temporary classrooms I remember in my school days which were not very warm. There's another question Luke on whether falling funding per pupil, whether there's any evidence that that's affected pupil attainment of performance.
What you want to know is what happened to national people results if people spending hadn't fallen but we never observe that counterfactual. It's incredibly hard to discern it from descriptive statistics. What we know from most of the academic literature is that falling levels of spending for people does lead to reduction where the blank comes and that's been tested across a range of settings and contexts. One would expect it to reduce that compared with a situation where people spending having fallen. We know that the pupils that benefit most from spending and received the biggest shock when spending is reduced if peoples in deprived backgrounds because they benefit more from being in school.
One last one on school's funding and I might zoom back out again. I have talked about this before, is this question of the compensation for the health and social care levy. If you're fortunate enough not to be buried in the details of this stuff. When she soon announced the health and social care levy, which is effectively an increase in national insurance, that also increases the costs for public sector employers like your schools or hospitals, prisons because they have to pay higher national insurance for the stuff that they employ. The treasury said we're going to compensate you for that so you won't be any worse off as a result of this tax rise. Now, that tax rises since been cancelled or undone and the Treasury haven't. I don't think I said this publicly, but they've confirmed privately that the compensation for those potential employers will also be withdrawn, so the school's budget, the NHS budget, the prisons budget will be reduced so that those departments are no worse off because their staffing costs are lower, but their budget will be on paper lower as well. Now the question on Slido is how that funding is actually going to be removed because the mainstreaming of the supplementary grant has already been announced by DFE? I don't know if you have any to sit on that. I'll just say that I don't know how it's going to be removed. My expectation would be that the spending plans and departmental settlements that were published alongside the spending of you will have to be adjusted accordingly. We may not get that at the physical event next week if it goes ahead. But on the specifics of DFE, do you have any thoughts, Luke?
Yes. This is one of the issue I played see a question on this interesting issue.
Suddenly lost my train of thought. Lost the issue itself. The issue is basically the time for education was incredibly sensible that how it allocated the funding for this and we'll pay the price of being very sensible. They put all this extra compensation funding into their main school funding system because they wanted to keep everything nice and simple. It's basically just gone into the basic amount you get for a people aged 4-11 or people age 11-16, so they've mainstreamed it and made it very part of the normal assignments will funding settlement because they expect it to be a standard part of funding going forward. But the sudden reduction in the role of the hellish etc, Kennedy family room, that compensation means they have to do that very sensible policy decision. It will only be able to be delivered by cutting plans who are funding rates for next year and I suspect the department education hasn't gone into that details of that funding announcement yet because they're waiting to see what happens in the medium-term fiscal segment, which is very sensible approach. But it's important to look towards the effect that this should be financially neutral for schools. They're not having to pay the health social care lot there anymore and they're not receiving the compensation to pay for it. But DFE will have to go through various hoops to try and actually make it cost neutral for schools because it gets complicated because as they've been very sensible in the first place.
Yes. One of the many hidden costs of having such policy instability in so many U-turns. Although to simplify this, we may well find out next week at the health and social care levy will happen after all and will remain in place so we'll have to wait and see. There's a question here from John, who I applaud as the only person brave enough to put their name down on Slido. He says, how can we reach a consensus that in order to have some good public services, we need to pay more in some collective way, not taxation then what? It's a big question. I think it's ultimately a political question, John, about creating this. If you want to create demand for more public services and you want to convince people that it's worth paying higher taxes to do that, that's a task for a politician. I think that there's a few points to make. One is that we've seen in recent weeks some of the dangers of thinking that you can permanently detach our levels of tax and levels of spend. They can't diverge forever. Eventually, filling that gap with borrowing raises questions about sustainability of public finance. I think that the new prime minister, the new Chancellor, was willing to put up taxes in order to increase spending and that might be an approach that we see carry on. But I think there's a bigger question about the challenges posed by ageing and the pressures that places on the NHS, on our state pension bill and social CAD bill, so there were questions about how much funding should come from the state. If the government was serious about trying to reduce government spending in order to reduce taxes through our radical things that could do around more role for charging in the NHS rotary charge of prescriptions. Could you apply them are widely? Could you think about means testing the state pension? Could you think about scaling back the generosity of the proposed social care funding reforms? There is a balance to be struck about the public versus private contribution to these things. But those are questions, first and foremost for politicians because they're distributional questions. If any of you have any comments on that digital pin, otherwise, I'll plough on with a question. Two questions I'm going to group together for you. She's about this public versus private comparison and what's happening in the broader economy. One is, is there a danger if we're comparing public and private sector analysis? Probably could, perhaps at the wages that was pitting workers against each other, you might have some thoughts of why we do that exercise. Then relate to their guess is what the path is for the wages and the wider economy and high inflation, but also economic headwinds feeds through to that. How might that feed through into decisions about public sector pay?
Sure. I guess one of the reasons we're consistently providing this comparison between the public and private sector rather than mixing well because against each other as more to provide a picture of how much recruitment and retention might be effective in the public sector by more widespread changes. We think that for public sector workers, a key issue is going to be how much they might expect and elsewhere, and they leave their jobs and go work in the private sector? Or for workers making the choice over which sets it's a joint the relative pay offerings and pension offerings and other things in the two sectors is going to be really key in effect from that decision, so it's just helped make analysis the public sector patrons will trend enable us to look at whether recruitment and retention might be expected to be affected more for various workers to the break dance that learns provided a highly paid workers or for women versus men or practices like that. Sorry. Do you mind just repeating what was the second part of that question was?
Sure. It's just about the broader economic outlook and how, given what you said about the importance of thinking about the price of the benchmark. But if we seeing in the wider economy, higher nominal pay growth or cash pay growth than we might otherwise have expected but perhaps below inflation, what pushes with it put on the public sector and how public sector workers feel about this deal that gets him.
Yes. We might expect that to really Western theories, recruitment to retention challenges for public sector workers if they're not seeing the same pay and detect the government doesn't make any changes, the five percent payloads are fit this year, that might then be really challenging for public sector workers and you might see increased public sector workers perhaps deciding to move to the private sector, wages are grown significantly faster.
There's a question here about what you're talking about, Lawrence. Might work as be willing to trade higher pension tomorrow through some of that away for higher pay today? I think I agree with you that the lots of workers might quite like that deal particularly the present moment in time and give them flexibility of their pension arrangements. I guess there's a question that was raised here is that might push up borrowing in the near term. If effectively the government's paying more on pay today, unless out in pension, say 20 years down the line? Well, it's possible that's true. I think that in general, we would say that policy decisions should be based on the accounting treatment and short versus long term public finance impact. If that's better policy mix, the better way to structure remuneration and that would lead to a better deal for public services. I think that would be the argument for doing it, not because it might push up borrowing in the near term. I guess also if the current is framing all of its fiscal targets in the lens of is debt falling in a particular year. For adding, it pushes borrowing and developing every year roughly equally, that wouldn't make any more difficult to achieve. I don't think, but I think that it shouldn't be the primary lens through which we view such policy debates. Look very quickly on how per people funding varies across a disadvantaged and not disadvantaged schools and maybe how that's changed over time and I think we're going to have to wrap up up after that.
Sure. Currently, schools in more deprived areas or more deprived end date to receive higher levels of funding, so it's around 20, 25 percent extra for schools and more deprived areas and that partly comes through actually funding from the formula, but also by other people premium. However, if we look at changes over the last 10, 12 years, we know that schools in deprived areas, I've seen bigger cuts and people then schools in less deprived areas and that's partly because when the government introduced the national funding formula in April 2018, the formula is more generous in schools in less deprived areas because of the introduction of minimal funding levels.
Thanks very much. Thank you to Bee, Luke, and Lawrence. Thank you everyone for joining. Thank you to the SRC for putting on the festival social science. This is the first of six events the IFS will be hosting. There's another one on Thursday looking at how we might create a more equal education system. That'll be at the same time, 1:00 PM on Thursday and please do check. I'm sure if you Google SRC festival social science can find lots of other interesting events. Thanks for joining and have a fantastic rest of the afternoon.