Higher public sector wages in Scotland a ‘fiscal challenge’, think tank warns

Higher rates of public-sector pay north of the border present a “fiscal challenge” to the Scottish Government – with “no evidence” the bigger pay packets have improved retention rates for staff, a new report has found.

Research by the Institute for Fiscal Studies (IFS) highlighted the “relative generosity of public-sector pay deals in recent years in Scotland compared with England”.

Paying the wages of public-sector workers north of the border is likely to cost close to £27bn for 2024–25, its new report said – with this cash accounting for more than half of devolved day-to-day public spending.

While wages for public-sector staff – such as council employees, NHS workers and teachers – were “very similar” across the UK in 2019, rises in Scotland meant by 2024 the median hourly pay rate was almost 5% higher than it was for the UK as a whole.

Higher pay rates mean a newly-qualified nurse earns £31,892 a year in Scotland compared to £29,970 in England while a newly-qualified teacher receives a salary of £33,594 in Scotland, again higher than the £31,650 offered in England.

With Scotland also having a larger public sector than England – 22% of the workforce north of the border are employed in the public sector, compared to 17% in England – the report said this rising bill could be “particularly challenging” for the Scottish Government.

The report explained this is because “its share of the increase in pay bill costs is likely to be higher” than the cash received from Westminster, with this “due to higher current levels of pay in Scotland compared with the UK as a whole”.

As of September 2024, there were 585,000 public-sector workers employed in Scotland, with this total having risen by 11% (56,000) since 2017.

With improving recruitment and retention said to be a “key potential rationale” for rises in public-sector pay, the report went on to say there was “no evidence” retention had improved.

It added: “Indeed, if anything, retention has fallen (with the leaving rate rising), both in absolute terms and relative to England.”

Given the cost of public-sector wages, the IFS suggested to Holyrood ministers it would “likely be wise to target increases in pay scales at the parts of the public sector where recruitment, retention and motivation issues are most keen, and where additional pay may help to resolve them”.

The think tank also said the Scottish Government should carry out work to evaluate the impact of its policy of having higher rates of public-sector pay.

The report said: “The higher levels of public-sector pay present a fiscal challenge for the Scottish Government, especially if it wants to align with (or exceed) the pay increases implemented by the UK Government while starting from a higher baseline level of both employment and pay.

“As with its income tax policies, which have increasingly diverged from those in the rest of the UK, it should also commit to evaluating the impact of its public-sector pay policies on recruitment, retention and productivity.”

IFS associate director Jonathan Cribb said: “Scotland has not only increased the number of public-sector workers more quickly than other parts of the UK, it has also increased their pay more quickly.

“While these are reasonable priorities for Scotland, it adds to the Scottish Government’s fiscal challenges, given that funding from the UK Government will not reflect these Scotland-specific decisions.”

He continued: “It’s not obvious from the available data that higher public-sector pay growth has delivered benefits in terms of improved staff retention.

“The Scottish Government should undertake or commission research to understand better the impacts of its pay policies and consider targeting future increases in pay where there is clearest evidence of recruitment, retention or motivation problems.”

The Tories said that higher public-sector wages in Scotland “are bleeding taxpayers dry”.

Party finance spokesman Craig Hoy said: “This is typical of the SNP’s complete disregard for taxpayers’ cash and their abject failure to deliver value for money.

“Hard-working Scots are paying more in tax but there’s been no attempt by the SNP to rein in spending, to tackle waste on an industrial scale or to improve public services.

“The pay bill they’ve presided over is frankly unaffordable, which is why emergency financial statements have become regular events under the SNP.”

The Scottish Government has been contacted for comment.