Ron Hewitt: Public-sector pay requires fundamental reform

Silver bullets are hard to come by when tackling budget deficits. Public-sector pay "restraint" is perhaps the closest politicians can get to a painless reduction in the size of the state. It is difficult to argue with this approach. After all, the recession was a corrective of incomes being artificially inflated by debt. The alternative involves redundancies as whole programmes are closed down.

This dilemma mirrors the private-sector experience which has responded with remarkable flexibility and saved thousands from the dole. In Edinburgh, there are now just 2.9 claimants per job vacancy, down from 3.5 a year ago. Employers and workers have worked together to save jobs through part-time arrangements, bonus and salary cuts and reduced benefits. Now it is time for public-sector staff to show the same dynamic approach. Again, the experts are predicting pain. Can they be confounded?

While employees and employers might be willing, their terms of employment might restrict progress, particularly if the unions intervene. There are some who dispute not just the need for pay restraint, but the case for public spending reductions overall. But in the end such a stance will just result in jobs lost, either through cuts made elsewhere, or through higher taxes and thus lower business activity.

This brings into question centralised pay bargaining in the public sector. Pay and conditions (and I include pensions) should respond to changes in supply and demand on a business-by-business basis.

Pay restraint is a sensible way to reduce the deficit. And it could be an opportunity for more fundamental reform. If every school or hospital set its own pay and conditions, they could control their budgets in response to changing economic circumstances, recruiting and retaining talented staff with more generous packages, or moderating pay settlements instead of having to make redundancies. Pay would revert to being a business decision, rather than a political trial of strength.

• Ron Hewitt is Chief Executive of the Edinburgh Chamber of Commerce.