Pay freeze could drive people out of public sector, while not saving much money

The Government's controversial decision to effectively freeze public sector wages will not make "material reductions in cost growth", according to Treasury, which warned that the Government would struggle to complete its work if the wage freeze began to drive people out of the public sector.

Treasury also said the Government would have to make tough choices between its desire to improve wage equity while at the same time exercising caution in public spending and borrowing.

In May, Finance Minister Grant Robertson and Public Service Minister Chris Hipkins announced public sector workers earning more than $60,000 could only expect pay increases in "exceptional circumstances" while those on more than $100,000 wouldn't get a cent more over the next three years.

Robertson blamed the freeze on the need to keep a lid on the debt taken on during the Covid pandemic.

"As the recovery gets under way, we are keeping a close watch on the debt taken on during Covid-19 to support the economy," Robertson said.

But Covid-19 was only part of the story. Treasury advice to Ministers in February warned historic trends in public sector wage growth, dating back to well before Covid, had seen wages increase faster than other lines of public spending. This meant pay was taking up a larger and larger proportion of Government costs.

The current Government's "equity-driven" wage policies like the living wage and pay equity agreements, had added to this problem, as pay equity agreements "directly and permanently increase wage expenditure" for the Government.

Officials warned that public sector wages were already increasing disproportionately in relation to other public sector spending. Treasury warned that if the trend in public sector wage growth did not slow, there would be a $6.6 billion gap between wage demands and forecast spending set aside to pay for personnel in future Budgets.

However it is not clear that the pay freeze would save much money.

"[W]e do not expect pay restraint to achieve material reductions in cost growth," officials warned, saying that "further trade-offs will be needed to meet the intended allowance".

Treasury's pessimism was based on the fact that the freeze might "indirectly" influence that "narrative context" for collective bargaining.

"[O]nly a limited pool of Public Sector employees are directly affected by pay restraint after accounting for those with contractual increases," officials said.

"Restraint is not unilaterally enforceable by Government because employment law requires any wage outcomes to be agreed in good faith with the employee's bargaining agent.

"Control over wider wage expectations is limited further by better than anticipated economic conditions," they said.

Treasury officials appeared frustrated about the level of advice on the decision.

One paper presented before the policy was taken to Cabinet committee noted that Treasury had not seen "a full set of analysis around anticipated benefits and risks".

Despite this, it cautioned the Government to develop an "exit strategy" for the freeze, saying that the policy could have a "negative impact" on the running of the Government, likely because it would drive qualified workers out of public service.

Officials ultimately warned that the Government's twin objectives of achieving "wage equity" while exercising "restraint" with spending overall, were "unlikely to be possible", unless cuts were made elsewhere.

These trade-offs could include an attempt to "prioritise pay increases toward priority groups", like the low paid, and "most vulnerable".

However, even then, officials said the Government would have to look at other areas of public spending to cut back on if it wanted to pay workers fairly, warning that "wider trade-offs" would be needed "due to the limited fiscal cost reductions available".

Robertson and Hipkins were approached for comment.