Wednesday, February 02, 2011

The IFS Green Budget: public finance challenges and public sector pay premiums

Much of the media coverage of the Institute for Fiscal Studies’ (IFS) Green Budget (press release and full document pdfs available) has focused on the message that George Osborne should resist the temptation to have a giveaway Budget. A quick look at Google News suggests that there are fewer headlines about the Green Budget on desirability of a Plan B.

The IFS forecasts that the government will borrow slightly less in 2010/11 than the Office for Budget Responsibility (OBR) forecasts. Will the Chancellor splash out or even give a gentle stimulus when the recovery stalled in the fourth quarter last year?

There has been speculation that the Chancellor may delay the planned fuel duty rise. I had wondered if he may find some loose change for 16-18 students who lose the EMA grants.

The IFS’s warning against a giveaway on 23 March arise from two downside risks for the public finances.

1) the economy might not grow as quickly as the OBR expects, and even if it does the public finances might not bounce back as strongly as it forecasts.

2) the planned spending cuts might prove formidably hard to deliver.

Other commentators have suggested that the cuts may be hard to stomach. The IFS warn that the success in reducing public spending in the 1990s is of limited relevant. This is “the tightest five-year period for public spending since at least the Second World War”.

The IFS notes that

Spending plans set out in the October 2010 Spending Review imply a significant public pay freeze and large employment cuts.

Controversially it goes on:

Before the financial crisis, public sector employees were, on average, paid at levels roughly in line with their private sector counterparts once observed differences in skill composition were taken into account. Since 2008, a significant public pay premium has appeared. We do not therefore believe that the planned two-year pay freeze will lead to widespread recruitment problems in the public sector in the near future. However, the average pay differential hides large variations in relative pay between different areas of the country. Consequently, some public sector vacancies, especially in London and the South-East, will remain hard to fill.

Talk of a 6% public sector premium for men and over 10% for women could well show up in this spring’s debates about pay and pensions.

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