Treasury defends public sector pay

Pre-Budget Submission: CBI tells Chancellor that rising wage costs threaten improved services
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The Independent Online

The Treasury yesterday took the unusual step of publicly rubbishing a pre-Budget submission from the Confederation of British Industry, calling it "misleading" and "perverse".

In its submission, the CBI warns that increased public sector spending is being eaten up by higher wage bills with little evidence of improvement in services such as health and education. It calculates that unless the Government "gets a grip" on public sector costs this year they will eat up £7.5bn that would otherwise be available to improve services.

Digby Jones, the CBI's director-general, said Gordon Brown, the Chancellor, faced a painful choice between scaling back investment and increasing taxes. When the private sector was "busting a gut" to be productive and competitive, taxpayers were entitled to expect the same of the public sector.

According to the CBI, the unit cost of public service provision increased by 7.6 per cent over the past year, compared with the annual 4 per cent set out in last April's Budget, adding up to £7.5bn for the current financial year.

In the year to June, public-sector wages grew by 5.1 per cent compared with 3 per cent in the private sector. The number of public-sector jobs rose by 181,000, but output per job fell by 0.5 per cent. In the private sector, output per job rose by 1.8 per cent in services and by 4 per cent in manufacturing.

Mr Jones said: "The Treasury cannot ignore an efficiency problem that threatens to undermine the Government's investment programme." He urged the Government to adopt some form of benchmarking to measure performance and encourage competition between public-sector providers.

But a Treasury spokesman said such measures had to take account of service quality. He said: "If a teacher takes a bigger class, productivity rises but I don't think the CBI is calling for bigger class sizes. And as far as pay inflation is concerned we make no apology for putting up nurses' pay by more than inflation."

He added that the Treasury shared the CBI's concerns about public-sector efficiency, but was tackling it by cutting bureaucracy and looking at whether jobs could be moved out of London.

In a separate submission released today ahead of Mr Brown's statement next month, the Engineering Employers Federation calls on the Chancellor not to increase business taxes nor add to manufacturers' costs at a time when industrial recovery is fragile, and made the more so by last week's interest rate rise.

The EEF said anything which added to industry's costs would delay much-needed investment and spending on innovation and skills.

The EEF also called for additional capital allowances and wider environmental tax breaks, but like the CBI said the number one priority should be no rise in business tax or regulatory burdens.

Next week the CBI annual conference in Birmingham will be addressed by Tony Blair, the Prime Minister, Mr Brown, Patricia Hewitt, the Trade and Industry Secretary, and Michael Howard, the new Conservative Party leader.