While average wages are forecast to finally rise faster than inflation next year, there'll be no end to the squeeze for public sector workers, who have had their pay increases capped at 1% until at least 2015-16 (a real-terms cut). The average worker is already £2,000 a year worse off compared with 2010 after the two-year pay freeze. (In the most recent quarter, their pay fell in nominal terms by 0.4%.)
Based on current trends, the OBR forecasts that public sector will fall by 8% relative to private sector pay between 2012-13 and 2018-19. In a new analysis today, the IFS warns that, as a result, "some public sector employers may well find it increasingly difficult to retain and recruit high quality workers". it adds: "both the government and pay-review bodies need to pay great attention to indicators of whether the public sector is facing any difficulties in recruiting and retaining high-quality staff, and decide on settlements in light of any such evidence."
Alternative, it says, the government could increase the level of public sector job cuts beyond the (remarkable) 1.1 million planned by 2018-19. But this, too, would risk harming services. The longer austerity continues, the clearer the consequences for public services (and those most reliant on them) will become. The IFS has forecast that merely to maintain the current level of cuts, taxes or welfare cuts will need to increase by £12bn. If Labour and the Lib Dems intend to avoid sticking to Osborne's plans, the urgent question is how they will fill this fiscal gap.
For Osborne, public sector pay restraint is an essential component of his deficit reduction programme (which, even after recent improvements, remains £51bn offtrack) but if the Tories want to expand their support, they would be wise to offer some relief. As Renewal, the Conservative group aimed at broadening the party's appeal among working class, northern and ethnic minority voters, has noted, the majority of Tory target seats have a higher than average share of public sector workers, including 60% of Labour-held targets and half of the top 20 Lib Dem-held targets. While the Tories are likely to pledge to cut taxes for all workers, in the form of a £12,500 personal allowance, they should also consider easing the squeeze on the public sector.