Leading article: The need for pay restraint in the entire public sector

There seems something very old fashioned about the return of public-sector pay as a frontline political issue, and about the reason cited by the Prime Minister for demanding restraint. Inflation is suddenly the bogeyman lurking behind the curtain just as it was the dragon to be slain 30 years or so ago.

Old-fashioned, however, does not mean irrelevant. At a time of considerable uncertainty in the national, as in the global, economy, it is sound planning to reduce the number of variables. Gordon Brown's New Year message, like his interviews in recent days, hardly brimmed with optimism about Britain's economic prospects. We are about as far as it is possible to be from the "irrational exuberance" of the United States in the Nineties. Caution, even anxiety, is in the air.

At his press conference yesterday the Prime Minister took critics of pay restraint head-on, insisting that it was in everyone's interest for the Government to meet its inflation target of 2 per cent. Exuding reasonableness, he said that there was no point in workers winning a big salary rise only to have it wiped out by a big inflation rise. We agree.

He also said that he wanted to move away from the annual pay round towards three-year deals, arguing that the resulting predictability would benefit not just the employer, but employees. That might be stretching the point, as trade unions were quick to point out. Headline figures for inflation also tend to disguise the real rate experienced by many, above all the lower paid, especially with utilities bills set to soar.

None of this, however, dilutes the imperative to keep public-sector pay rises within the 2 per cent set by the Government, if necessary by phasing awards made by review bodies. Nurses expressed their unhappiness at the staging of their award last year; the police are in revolt against the non-backdating of their 2.5 per cent. Discontent is mounting elsewhere in the public sector. But there are inescapable truths to be recognised.

Despite many plans and promises, and the 2004 Gershon review of public-sector efficiency, the number of people employed in the public sector remains at a stubbornly high level. Large sums have been poured into education, the health service and law enforcement, often without commensurate improvements in productivity and service. Meanwhile, job security and pension arrangements remain far superior to those in most of the private sector. If ministers still flinch from the action necessary to tackle the cost of public-sector pensions, as they did in 2005, they should at least make employees more aware of the value of their benefits.

Restraint, however, cannot just be about a raw percentage pay increase, however useful that may be as a yardstick. It must also suggest fairness and be mutual. Generous past settlements for police, doctors, nurses and others have created anomalies, leaving social workers, among others, on the sidelines. The widespread use of agencies to employ less skilled labour has created huge pay gaps and disparities in conditions among those who work side by side.

And what may be seen as penny-pinching on the pay of already low-paid staff becomes less acceptable if those at the top are seen to indulge a profligacy they will not tolerate further down. Computer schemes that waste millions; consultants engaged at vast cost to duplicate, or replace, work that civil servants are paid for; incompetence and buck-passing in departments "not fit for purpose": these are areas where ministers must produce some value for money of their own.

The Prime Minister and the Chancellor have a battle on their hands. If they want to win it, they have a duty to keep their own house in better order.