The big freeze: is the NHS pay deal fair?

While the continuation of austerity beyond the next election will almost certainly mean more tough decisions on public spending in the next spending review, today's Budget was all about warming up to electorate for the election with eye-catching policies on tax and pensions.

Comment

Published: 19/03/2014

Today’s Budget contained no new announcements when it comes to health and social care. While the continuation of austerity beyond the next election will almost certainly mean more tough decisions on public spending in the next spending review, today was all about warming up to electorate for the election with eye-catching policies on tax and pensions.

The big news as far as the NHS is concerned had already been announced: last week the Government set out its decision on NHS pay over the next two years.

NHS staff in England who receive incremental pay award will not have any additional rise. Those not eligible for incremental rises will mostly receive an increase of one per cent a year in cash terms. Around 400 very senior managers will have their pay frozen in cash terms. This is lower than staff had hoped for and has led to talk of potential strikes.

Why are people so angry, why was a better increase not offered, and are staff right to feel aggrieved?

With pay accounting for over 60 per cent of the cost of delivering services, any restrictions in pay will provide immediate savings across the board

In common with other public sector workers, almost all NHS staff have seen their earnings squeezed following the 2008 global economic crisis. Between 2009 and 2013, real terms average annual earnings for NHS staff fell by an average of 0.4 per cent a year.

The changes in real terms earnings were not evenly distributed across NHS staff groups. The biggest reductions were for ambulance staff and hospital and community health service (HCHS) doctors, falling by an average of 1.9 per cent and 1.8 per cent a year respectively.

Average earnings for qualified nurses, midwives and health visiting staff feel by an average of 0.7 per cent a year in real terms. Meanwhile clinical support staff and infrastructure support staff received average annual increases of 0.1 per cent and 0.4 per cent respectively.

This compares to an average increase in NHS staff pay of two per cent a year in real terms (i.e. accounting for inflation) in the 35 years before the 2008 economic crisis. With the current rate of inflation at 1.9 per cent, the current deal equates an additional year of falling real terms pay for a large number of employees. It's easy to see why staff are unhappy.

Why not offer the pay increases that staff wanted? It's no secret that the English NHS is wearing a financial straight jacket at the moment, tasked with making efficiency savings of four per cent a year, without reducing the quality of care provided to patients.

In our report: A decade of austerity? The funding pressures facing the NHS from 2010/11 to 2021/22, we showed that changes in the level of pay has a large impact on the size of the potential funding gap facing the NHS over the next 10 years.

The pay restrictions to date have been a major contributor towards most NHS Trusts meeting their financial targets. With pay accounting for over 60 per cent of the cost of delivering services, any restrictions in pay will provide immediate savings across the board.

For nurses working in England, particularly outside London, there are very few choices of employer aside from the NHS. Due to this, as an upcoming report from the Institute for Fiscal Studies (IFS) and Nuffield Trust shows, the supply of nurses does not change dramatically with the level of pay in the short term (in economics jargon: the supply is inelastic).

So a fall in annual earnings tends not lead to a large drop in the number of nurses available in the short term. This goes some way towards explaining why there was only a one per cent fall in the number of nurses between September 2009 and August 2012.

Years of pay restraint have made a large contribution towards meeting the funding gap whilst maintaining a similar level of staff. So from a financial point of view, it's easy to see why this decision has gone the way it has.

Source: Institute for Fiscal Studies

So are NHS staff right to fell hard done by? It's worth looking at what's happened to pay in the private sector for some comparison. In 2007, just before the economic crisis, public sector pay was higher than private sector pay on average, even after accounting for differences in skills and experience (the public sector has a more highly educated and more experienced workforce on average than the private sector, which is partly due to the nature of the jobs and partly due to contracting out of lower skilled public sector jobs).

Since 2008, average pay in the public sector has fared comparatively better than in the private sector (to use the jargon again: the public-private pay differential has risen, as shown in the chart). This is because private sector earnings responded very quickly to the recession in 2008, but the public sector pay response lagged as many public services were locked in to multi-year pay deals.

Analysis by the IFS shows this trend is expected to reverse in the near future, with the difference between public and private sector pay expected to return to 2007 level by 2015/16, but this is still in favour of the public sector. It’s also worth noting that these are pay rates, before accounting for pensions and working conditions which tend to be more generous in the public sector.

While it would be wrong to imply that public sector workers have received excellent pay settlements in recent years, it is fair to say that on the whole they have fared better than most private sector workers.

In the current financial climate, last week’s pay offer makes sense financially. But we do not yet know the full long-term effects on morale, recruitment and retention of continued pay restrictions. With demand pressures on the NHS continuing to rise, and greater awareness of the importance of an engaged staff following the Francis review, we are expecting more and more from the NHS workforce.

There is a limit to how long pay restrictions can continue to be used to close the NHS funding gap without impacting on the ability of the NHS to recruit and retain the staff it needs to deliver high quality care. I hope that we can find other solutions for the funding gap before we find this limit.

Suggested citation

Roberts A (2014) ‘The big freeze: is the NHS pay deal fair?’. Nuffield Trust comment, 19 March 2014. https://www.nuffieldtrust.org.uk/news-item/the-big-freeze-is-the-nhs-pay-deal-fair

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