Regional Pay (Public Sector)

HC Deb 18 June 2003 vol 407 cc99-122WH

2 pm

Adam Price (East Carmarthen and Dinefwr)

I am very pleased to have secured this debate on an issue that is of vital concern to millions of public sector workers in Wales and Scotland and throughout the United Kingdom. The Government have made a few fairly oblique references to the idea of regional pay since it was initially floated during last year's comprehensive spending review. The Chancellor gave a vacillating performance when he was grilled recently by the Treasury Committee. I hope that today's debate will be an opportunity for the Economic Secretary to clarify the Government's intentions with regard to regional pay.

Confusion is the hallmark of Government policy and actions at the moment. We have been told by a former Minister at the Department of Trade and Industry that it is not a question of regional pay, but of localised settlements and city-specific weightings. However, the inflation indices that the Government are to produce will be composed on a regional basis, which would seem to suggest otherwise. The Chancellor said in his Budget statement that he would introduce measures to ensure that public service pay systems were more responsive to regional labour market conditions.

From the outset, I must say that the policy is ill conceived, short-sighted and based on false premises, and will have some fairly far-reaching negative consequences if implemented. Those Labour Members who are not here may be forgiven for feeling bewildered as to why the Chancellor wants to go down such a road. After all, it was his predecessor, the right hon. and learned Member for Rushcliffe (Mr. Clarke), who talked about the end of the going rate for a job, and national pay bargaining, a policy that was roundly condemned by Labour in opposition.

Last Monday, in the Chancellor's statement on the euro, we were told that as part of the Government's approach to euro entry the UK economy needed to be made more flexible, and that one of the ways of achieving that was to introduce regional pay differentials in the public sector.

Mr. Michael Weir (Angus)

Does the hon. Gentleman share my concern, which perhaps goes beyond the immediate issue of regional pay? Buried amidst the 1,700 pages that the Treasury released last Monday was a policy prescription for people in what it called "contracting regions" to either move away or accept lower pay. Will those policies not result in a disaster for areas like Scotland and Wales? In Scotland there is a projected decline of 500,000 people over the next 40 years. Will such a policy not exacerbate that situation?

Adam Price

The hon. Gentleman makes a valid point. The issue is wider than that of regional pay in the public sector. It also relates to the Government's embrace of neo-liberal attitudes to labour mobility. I will come to that in one second.

The Treasury's paper on economic and monetary union and labour market flexibility refers to the role of regional pay differentials as an element of labour market flexibility, but it is not the only element. Geographical mobility is a factor, but so are employment flexibility and functional flexibility which is the ability of the labour force to acquire and apply different skills. Chart 2.4 of the Treasury's paper on labour market flexibility shows that the UK already has a high level of real-wage flexibility—significantly higher than that of Germany, Italy, France or Spain.

The imposition of regional pay differentials in the public sector simply is not required, and is certainly not a priority if the goal is to increase labour market flexibility. That was reiterated by Michael Porter in the recent DTI report on United Kingdom competitiveness, which stated that labour mobility and wage flexibility in the UK are effective. I suggest to the Economic Secretary that if the Government want to increase labour market flexibility they should focus on improving functional flexibility with heavier investment in education, training and lifelong learning.

Mr. Mark Field (Cities of London and Westminster)

The hon. Gentleman referred to the interesting paper by Professor Porter on competitiveness. However, that paper reflected differentials not so much in the public sector as in the private sector, where there are greater pay differentials. If I am lucky enough to catch your eye, Mr. Benton, I shall give a different perspective, from the viewpoint of London and the south-east. There is a great distinction between markets in the public and private sectors.

Adam Price

I accept the hon. Gentleman's point. Professor Porter pointed to the failings of regional economic policy in the UK and stated: In the US there is a convergence of prosperity across regions. In the UK there is divergence. The rich are getting richer and the poor are getting poorer. The key point is that according to the Treasury's paper on wage flexibility in the UK, there is no problem. That is a false premise and is not the only piece of sloppy thinking behind the Government's regional pay proposals. Incomes Data Services said—

Dr. Rudi Vis (Finchley and Golders Green)

What does the hon. Gentleman think about London weighting?

Adam Price

London weighting is a long-established convention in public pay setting and goes back many decades. It differs from job to job and the proportion of salary depends on the age and seniority of individuals. It is not that dissimilar to the weighting systems used in other administrative capitals in Europe. The Government are suggesting an expansion to a regional weighting system and a significant increase in the level of enhancement. I shall return to that shortly.

Another false premise behind the Government's policy is the assumption that pay in the private sector is set by local decision making driven by market conditions. Most large companies have UK-wide pay structures with allowances for high living costs in some areas. Barclays bank has central London weighting, but a cashier in Cumbria receives the same pay as a cashier in Kent. The Government are keen to adopt private sector practices, so why do they not adopt the principle of pay parity? It is not true to maintain, as the Treasury attempts to, that the public sector is monolithic in its approach to pay determination. We probably have one of the most fragmented public sector pay structures in Europe apart from Sweden. There is a great deal of flexibility in the public sector, not just with London weighting, to deal with difficulties associated with the high cost of living in different areas. What there is not is an appetite to return to the failed policies of local level pay setting—for example, as in national health service trusts under the previous Government and grant-maintained schools. The NHS in Wales and Scotland is still obliged to cope with the problems created by mistrust and poor morale through equal pay disputes because some workers are contracted to the local trust and others work for the NHS centrally. We need only look at the chaos created by 36 different rates of pay for drivers throughout the railway industry to see the negative effects of local pay setting.

It is no wonder that the main civil service union, the Public and Commercial Services Union, is trying to recreate a national pay framework because of the anomalies that have resulted from bargaining on a departmental basis. We see similar trends elsewhere. For example, the university sector has brought together 10 different bargaining groups into one integrated pay structure. As for further education in England, a new national forum on pay modernisation has been agreed as a way forward, after years of chaos because of the local pay arrangements.

It is not only the DTI that is opposed to the regional pay proposals, but the trade unions. Unison, the Association of Teachers and Lecturers, the National Association of Schoolmasters Union of Women Teachers and the Communication Workers Union have all voiced their opposition to the plans. Recently, Angharad Davies of the Royal College of Nursing in Wales said: We already experienced local pay under the Tories when nurses pay went down. We are therefore totally against regional pay. It would not be an advantage to the people of Wales. It would only serve to be an advantage to people in London. I should point out in the interests of clarity that Angharad is, to the best of my knowledge, an active and prominent member of the Labour party.

The National Health Service Confederation is against regional pay, as is the local government employers' organisation. Moreover, on local pay differentiation for teachers, which the Treasury is pushing for adoption as early as next year, the Department for Education and Skills told the School Teachers Review Body that national pay scales have value in promoting the profession to potential entrants. How would the advantages of a local element to pay be set against the loss of clarity in every school having slightly different rates of pay. How could (it be ensured that) variations occur for genuine reasons and do not simply drive wage inflation because of poaching and bidding wars between schools? I come now to another false premise.

Mr. Field

We shall work on the first rather than any subsequent false premise if we may at this juncture. Why does the hon. Gentleman believe that it is the trade unions that are so vehemently against the proposal? Does he not believe, as I do, that it would undermine the power of trade unions at a national level to have local pay bargaining that took account of local factors?

Adam Price

As I said, the NHS Confederation and the employers' organisation have voiced their concern about moves towards regional pay setting, too. For example, Sweden is the only major European country that has gone down the route of decentralised pay setting at local level. There is a large increase in wage inequality in the public sector in different parts of the country. That is a legitimate worry for employee representatives, but I listened with interest to what the hon. Gentleman said.

Mr. Weir

Is there not a dichotomy at the heart of what the Chancellor is proposing? He introduced the concept of regional pay on the basis of regional indices and said that there would still be national pay bargaining, but that the actual amount paid would be based on regional indices. That is different from what the hon. Member for Cities of London and Westminster (Mr. Field) is proposing in respect of local pay bargaining.

Adam Price

It is fair to say that regional pay is much cloaked in confusion, which is why we are all so keen to hear what the Economic Secretary has to say. The Treasury's own figures show that in some cases, intra-regional differences are as great in terms of wages as are inter-regional differences. It is difficult to see how regional indices in respect of cost of living data will help to address the more localised problems.

I refer to another problem with the Treasury's position. Recruitment and retention difficulties and the lack of affordable housing are not confined to London and the south-east of England. According to the Government's commissioned study from the university of Newcastle, there are no significant regional differences, for example, in the degree of job satisfaction reported by graduates working in the public sector. That does not confirm the hypothesis of a south-east-specific problem.

According to another piece of recent research by the Joseph Rowntree Foundation, in a league table of the least affordable areas of England for housing, 15 were located in the south-west, just four in the south-east and three in the eastern region. The research showed that there are no fewer than 33 local authority districts in England in which a small home costs over five times the average annual income of a local working household with earners in their 20s or 30s. That confirms evidence from the Council of Mortgage Lenders that young first-time buyers are currently having more difficulties buying property in the south-west of England than in the south-east.

The situation in respect of vacancies in the public sector, which is another key element of the Treasury's argument, is much more mixed than the Government's rationale for regional pay would suggest. Their figures show that the highest level of vacancies for key public sector workers in London is not, as the hypothesis would lead one to expect, in the areas of highest cost, but in those of lowest cost—the most deprived areas. That suggests that the drivers are not merely finance-related.

Mr. Field

On a point of information, the reality is that London is made up of a series of villages—relatively small areas, a short distance apart. People commute to places such as my constituency—a relatively wealthy authority by any standards—often from outside Greater London. Therefore it is fair to say that the hot spots of unemployment in places such as Newham and Hackney will attract few staff, but people who live five or six miles away will be happy to commute 10 or 15 miles beyond that side into other parts of London. It is for that reason, above all, that some of the poorest areas in London are most denuded of public sector staff.

Adam Price

I am grateful to the hon. Gentleman for his elucidation of London's geography, which I am still grappling with, two years after moving here to live during the week.

The hon. Gentleman makes a fair point, as there is a complex relationship between vacancy rates that are measured locally and travel-to-work areas, which are much more loosely defined. It is fair to say that there is a concentration of vacancy problems in the deprived areas of London, which mirrors the data that we have on vacancy rates, for example, for hospital doctors, radiographers, pharmacists, dentists and, in some areas, GPs. For some categories, such as hospital doctors, radiographers and pharmacists, the vacancy rate in London is well below the United Kingdom average. The rate is very high in places such as Wales and the north of England. It is probably the deprivation and the disamenity of living in those areas that is the problem for some of those key workers, rather than affordability.

The Government's cross-cutting review of the public sector labour market concluded: While cost may be a factor in explaining some vacancies in the public sector there is a complex web of other factors, including the unattractiveness of working in deprived areas. Put another way, if there were a direct relationship between cost and pay, in high cost areas one might expect the highest vacancy rates to be among the lowest paid occupations, but that is not the NHS experience. We could argue, therefore, that if the Government were considering enhancements to public sector pay, perhaps they should start by concentrating on pay premiums for those working in deprived areas, whether they be in London—where there are pockets of deprivation—or in south Wales, the north-east or the central belt in Scotland. That approach is used for the regional pay premium, where not only the cost of living but the amount of amenity or disamenity of living in a particular area is calculated.

There is a more generalised problem of vacancies in the public sector, which is related to the fact that over many years there has been erosion of pay in the public sector in relation to that in the private sector. According to an Organisation for Economic Co-operation and Development study carried out in the year 2000, the United Kingdom had the worst ratio of gross average earnings in the public sector to gross average earnings in the private sector of any of the countries studied, apart from Hungary.

To be fair, the Government have of late closed the gap to some extent, by means of higher baseline settlements and a rash of recruitment and retention allowances. However, as the hon. Gentleman pointed out, in London the wage gap between the public and private sectors has deepened substantially over many years. In the rest of the UK, private sector pay has not taken off to the same degree. That in large part reflects the realities of the north-south divide that the Government denied until recently.

Unfortunately, that policy on regional pay is precisely the wrong response to the problem of the north-south divide. It attempts to manage the problem, instead of dealing with its underlying cause. The problem is not that people in the public sector in Wales, the north of England or Scotland have paid too much, relatively, to public sector workers in London; it is that the public sector in those areas is paying too little compared with the private sector in the south-east. That merely demonstrates that the Government have not done enough to correct the wider imbalance between the south-east and the rest of the UK.

I strongly suggest that the solution to overcrowding, congestion, transport problems and high-cost issues in delivering health, education and policing in south-east England will not be solved by pay differentials in the public sector, because the problem and solution lie not in the labour market but in the housing market. The failure to regulate and develop the private rented sector, the collapse of social housing and the phasing out of employer-provided property in the NHS, the police force and the Prison Service have all had a negative effect.

The Government's starter home initiative, which provides £250 million, focused principally in the south-east, to help public sector workers deal with spiralling housing costs, is beginning to have some effect, according to the London Housing Federation. That initiative, and others backed by the Mayor of London, is beginning to improve the provision of affordable housing in the south-east of England. It is through such policies that we shall address that issue.

The problem with the policy on regional pay, from my perspective, is that it will be a serious blow to those who use and work in the public services in the rest of the country. In last year's spending review, the Government pointed at pay differentials of 50 per cent. in the private sector between different parts of the country, the implication being that those differentials should simply be replicated in the public sector. That was reinforced by the Chancellor recently, when he sent members of the Treasury Committee a copy of a polemic by Professor Andrew Oswald of Warwick university, simply and directly entitled, "London's Public Sector Workers need to be paid 50 per cent. more than those in the North".

I am not sure whether the Chancellor was simply being provocative. Perhaps the Economic Secretary could answer this simple question: is it the Government's policy that, in the long term, public sector workers in inner London will be paid 50 per cent. more than their counterparts in Wales or the north of England? It should be pointed out that the figure of 50 per cent. is at the extreme end of the spectrum, and compares the north-east and Wales with London.

The Economic Secretary to the Treasury (John Healey)

The answer is no.

Adam Price

Well, I am sure that public sector workers will breathe a huge sigh of relief for now, but one wonders why the Chancellor spoke so approvingly of Professor Oswald's paper. It would be useful to quote a little more widely from it. The Professor went on to say—both in that paper and others: More public cash has to be allocated to areas that are in driving distance from Big Ben and National pay scales have to go. Forced on Britain long ago by trade unions and bureaucrats, and today held in place…by political pressure from the North and Wales, they are doing real damage to our nation. That is what Professor Oswald, who has an imprimatur from the Chancellor, had to say. Severe damage would be done to the nation that I represent if we were to follow his suggestion.

Headline pay is obviously a powerful attraction, and there would be a natural tendency for the able and ambitious to move to where the highest salaries were paid if such a policy were introduced. There would be an inevitable drift of people to where those better-paid jobs were. That would put public services in places such as Wales, Scotland and the north of England under greater pressure than they are today.

There is another element: the effect on local and regional economies in the most disadvantaged parts of the UK. UK-wide levels of pay act as an economic stabiliser between the nations and regions of the UK. They redistribute wealth between more and less prosperous areas, and in the absence of effective regional policy that is an important factor in reducing the differentials in prosperity throughout the UK. We live in a country that has, by the Government's admission, the highest level of regional disparity of any EU state. If we moved to regional rates of pay in the public sector, the Government would remove one of the stabilisers that reduces regional differences. The Treasury cannot say that we need stronger regional economies, and then weaken the spending power of the biggest employers in those nations and regions.

Let us not forget that public sector employers are an important benchmark in their local economies for determining local pay in the private sector. Places such as Wales, the north-east and Northern Ireland, which will be most affected by this proposal for regional pay, are already languishing at the bottom of the UK wages league table. Perversely and bizarrely, if we adopted regional pay rates with a uniform tax rate across the UK, people from poorer parts of the country would subsidise public sector pay scales in wealthier regions. That would be completely unacceptable.

One is supposed to assume that the driving force behind this bizarre policy is an attempt to keep a lid on galloping wage inflation in the public sector. Clearly, the Government are worried about groups aping the firefighters and playing catch-up. One way the Treasury appears to think that it can insulate itself from that is to limit substantial real-terms increases to the most affluent regions. The Treasury's position is that it wants national pay awards to be more modest, to make possible what it sees as a more targeted approach to pay in hot spots where there are real recruitment and retention difficulties. However, the Government are clearly seeking to hold down pay demands from workers in the west and the north by claiming that the cost of living is cheaper. As Kevin Rowan, regional secretary of the northern TUC, said: This is a green light to employers to negotiate lower salaries in the North than in the South. Who will be the hardest hit? It will be the lowest paid in the lowest paid regions; in particular it will be women, who have relied on centralised pay bargaining in the public sector to reduce the gender pay gap in recent years.

In the 1980s, Reagan tried to drive down public sector pay when he introduced a policy of locality-based pay bargaining for the public sector, which was based on comparability with the private sector. Now, a Labour Government in the United Kingdom are adopting the same Reaganomics. From Cornwall to Cardiff and Cowdenbeath, regional pay will mean that employers will pay less and local economies will suffer. It will mean a deterioration in the quality of local services as key workers leave to higher paying areas. That is an inappropriate response to the problems of the south-east of England, which are much more fundamental than the policy suggests. One can only assume that we are looking at merely a whimsy on the Chancellor's part—or perhaps it was a crafty little spanner that he wanted to throw in the works in relation to the UK's entry into the euro. I hope that the Economic Secretary can confirm that the Government have no intention of going down the absurd route of regional pay scales in the public sector.

2.29 pm

Mr. Mark Field (Cities of London and Westminster)

I congratulate the hon. Member for East Carmarthen and Dinefwr (Adam Price) on introducing this wonderful, interesting and timely debate. It is certainly a live issue in London, as it is in the regions, which is evidenced by the fact that about 50 per cent. of the Welsh nationalists and 20 per cent. of the Scottish nationalists are in the Chamber today.

I want to touch on a number of the issues that have been raised by the hon. Gentleman, and I should be interested to get some clarification from the Economic Secretary as to the thinking of the Chancellor of the Exchequer on these matters, because the statement a couple of weeks ago did not make it clear precisely what was intended, and I suspect that quite a lot of water will have to flow under the bridge before we fully appreciate what regional pay bargaining may mean in the months and years ahead.

The hon. Member for East Carmarthen and Dinefwr made a lively speech. Last year, we went to America and saw how regional and federal government worked there. That was an eye-opener for me—and, I think, for the hon. Gentleman. There is a suggestion that we might take one step forward and try some kind of federalisation as far as the funding is concerned. This debate goes beyond the narrow aspects of pay differentials within different regions to the regional government that is being put in place by the current Labour Administration. We already have a Scottish Parliament, a Welsh Assembly and a level of devolution—although a narrow level—in London, and if we had regional government across the whole of England this sort of debate would be had almost daily.

I hope that you, Mr. Benton, and the hon. Member for East Carmarthen and Dinefwr will forgive me if I focus most of my comments on central London, because there are some distinct London factors. I was amused to hear the hon. Gentleman's suggestion that a change in the current regime would amount to a cross-subsidy from the poorer areas to the richer areas. I think that the hon. Member for Finchley and Golders Green (Dr. Vis) will agree that London Members feel that there is already a lot of cross-subsidy, but that it goes in the wrong direction: London contributes £20 billion a year to the regions as a whole, but it has an increasingly beleaguered public sector, and housing and many other things are unaffordable.

One need only look at a map of the United Kingdom, and at the far-flung rural constituencies that are in Wales and Scotland, to understand my next point. The whole of greater London—which has 74 constituencies—could probably fit within East Carmarthen and Dinefwr. For that reason, it is a much more localised market. Travelling is an everyday part of life for people who live and work in Greater London, but many who live in the poorer boroughs will work only five or six miles away, in much wealthier areas.

I turn to my own perspective. I suspect that the poor Economic Secretary will find himself beleaguered on all fronts. I am also critical of the Government although, I suspect, from the opposite side of the political divide from the hon. Member for East Carmarthen and Dinefwr. It seems to me that, in essence, there is an unholy alliance between a Government who are dominated by Scottish and northern English Members of Parliament and their trade union friends, which has resulted in a rapid diminution in the quality of life of many Londoners, who find that their hospitals, schools, police and other public services are increasingly denuded of staff because it is impossible for them to live in or even near central London.

The current system of national pay bargaining may suit the Labour party and its friends in the trade unions but it is something of a disaster for many of London's workers and residents, whom I represent. There is a very inadequate system of London weighting. Often, that amounts to as little as £3,000 a year, which utterly fails to take account of the big differences in the quality of life and cost of living between London and other cities. On graduating, a junior teacher will earn £2,000 or £3,000 more for working in a central London school—and therefore being expected to live in Greater London, or perhaps just outside it in the home counties—than a teacher in Sunderland or Liverpool. That takes no realistic account of the substantial differentials in the cost of living between those areas.

I was very interested to hear what seemed to many of my constituents to be warm words from the Chancellor on the differentials and the cost of living. My main concern was to know where and, more important, when the baseline would be drawn. As the hon. Member for East Carmarthen and Dinefwr said, there is a specific problem for London. Although I accept that the world does not start and end in London, as a representative of this constituency it might be understandable if I took a contrary view.

There is a problem that is specific to London that should not necessarily be thought of as extending into the south-east. Over the past 10 or 15 years the differentials to which the hon. Gentleman referred have, without a doubt, become ever greater between both private and public sector workers in the capital. Moreover, the problem of the cost of living faces both public and private sector workers.

Dr. Vis

Would the hon. Gentleman extend London weighting to pensions?

Mr. Field

I am sure that if I attempted to go down that track you would rule me entirely out of order, Mr. Benton. Nevertheless, the hon. Member for Finchley and Golders Green has allowed me a few more seconds of thin king time. I am sure that we shall discuss that matter in the months and years ahead.

It strikes me that pay scales alone need to mirror to an extent the private sector, in which wages take account of regional variations in the cost of living and the quality of life—that is an integral part of living in London.

There are always unholy political alliances on this matter. I have some sympathy, on this narrow point alone, with the Mayor of London. Those are not words that I will utter too frequently. There is a sense that the Chancellor should be paying up. We have seen this year the gerrymandering of the funding formula for local government. Westminster city council is not a typical local authority; for example, its uniform business rate raises some £850 million a year—almost £1 billion—and yet only £72 million is returned to it from central Government. I appreciate that that is a slightly unfair comparison, because it is by no means typical, but many London authorities feel that they are paying an enormous amount of money into central coffers and seeing little in return.

Adam Price

Would the hon. Gentleman not accept that many of the problems that he mentioned surrounding public sector workers in London could be addressed through a more generous pay settlement overall? I know that he loves America very much. In that country public sector workers throughout the land get a premium of 15 per cent., on average, over private sector workers. Would not such an approach deal with the problem in London and the south-west, and in other areas?

Mr. Field

I confess that I spent the first 18 years of my working life in the private sector, running my own business. Of course, having joined the public sector in the past two years, my perspective is somewhat different from the one that I might have had in the previous decade and a half. My instinct is that we need to give some sensible thought to how the public sector is rewarded. Some fundamental regional differences must be taken into account.

I am sure that the hon. Gentleman would agree, given his perspective on the lack of powers of the Welsh Assembly, that the fundamental issue is that the UK is a highly centralised country, not least in terms of financing. We were all well aware of things before the secret notes of that famous Granita restaurant meeting some nine or 10 years ago came to light. It is quite clear that centralisation has become ever more prevalent. I accept that such criticism could equally be planted against my own party, whose 18-year Administration came to an end in 1997. Ultimately, the real issue is the enormous power in the hands of the Chancellor of the Exchequer as far as the finance is concerned. We can debate the projects that are close to our hearts—be they infrastructure projects in Wales or London—until the cows come home, but it will make relatively little difference until a proper finance-raising power is in the hands of locally elected politicians.

I want to consider affordable housing, which the hon. Member for East Carmarthen and Dinefwr touched on, in more detail. Affordable housing has been a major issue in London over the past few years. Affordable housing schemes are insufficient. Indeed, by giving the impression of action on the differentials between the public and private sectors, and the differentials within the UK, they can be counter-productive.

The Mayor of London betrayed his almost total ignorance of economics with his plan to insist that 50 per cent. of all new development be affordable housing. The London economy has begun to slow down ahead of the game compared with many other parts of the UK, and developers are simply sitting on their hands. In the past year or two, there has been evidence that large scale development projects have gone on hold and that developers are taking the view that they will wait until the economy starts to pick up rather than run the risk of having to build 50 per cent. affordable housing on any land that they want to develop.

In my constituency, it is clear that the costs of even the most modest housing, such as former local authority housing, are astronomical. Even private sector workers in the City of London are unable to get a foothold on the property ladder and many of them must move into the suburbs or even beyond. London house prices are nothing new, and it is fair to say that any booming city requires a booming property market. When the property market begins to fall it is a clear indication that an economic downturn is on the way.

When it comes to affordable housing, key workers must include many of those in the private sector because the divide is not only between the private and public sectors. Shopkeepers and caretakers are part and parcel of the glue of a local community. Anyone who represents an urban constituency will realise that we must maintain those community values. Above all, key workers need a free market, which means comparable pay rates for London public sector workers.

I support the hon. Gentleman in securing the debate. He will appreciate from my comments that we agree on less than we might, but the issue is none the less important and will vex us during much of our political lives. I look forward to hearing the Economic Secretary give us an indication of the Chancellor's thinking. I can appreciate why the notion of local pay bargaining has caused such concern, but we must have some more meat on the bones to determine precisely how the policy will operate. From a London perspective, I should be interested to know whether regional pay would be backdated to ensure a baseline, which would mean a significant cash injection for those London public sector workers who currently find themselves in such difficult straits.

2.43 pm

Mr. Michael Weir (Angus)

I congratulate the hon. Member for East Carmarthen and Dinefwr (Adam Price) on bringing forward this important debate.

The question of regional pay was first mooted by the Chancellor in the pre-Budget report. At that time, the policy went down like a lead balloon. It is curious that the issue resurfaced last Monday in the debate on the euro. Perhaps the Chancellor has introduced a poison pill into the euro debate, because regional pay will be a huge issue in Scotland, Wales and north-east England. Arguing for slashing public sector pay in Scotland, Wales and the regions will sabotage much of the euro debate. The slogan, "Vote for the euro and get lower pay" will not go down well in many areas. The issue is serious because it will affect almost 7 million public sector workers throughout the UK, 653,000 of whom live in Scotland. Although we have heard much about London, it is worth remembering that the Office for National Statistics labour force survey found that in the UK as a whole, 23 per cent. of workers are public sector workers. In London, the figure is 21.6 per cent., but in Wales, Scotland, Northern Ireland and the north of England it is much higher. Regional pay for public sector workers will hit those areas most seriously. Those economies rely much more on public sector workers than do the economies of London and the south-east.

The hon. Member for Cities of London and Westminster (Mr. Field) introduced the question of pay in the private sector. The Government are fond of saying that unemployment has gone down in all regions. To an extent that is true, but it does not show that pay in many regions is much lower than in others. For example, in my area, Angus, unemployment has gone down but we are struggling with a low-wage economy. We are not seeing growth in the economy because the money is not there. Public sector workers in Angus, other parts of Scotland and many other areas are important because the fact that their pay is national means that they can inject a great deal of money into local economies that would not otherwise be there. This is a huge issue in Scotland, and I am surprised to see that not one Scottish Labour Member is present to debate it.

As I mentioned in an intervention, the issue goes much further than pay. Close examination of the Treasury's 1,700 published pages shows that it is part of an even more insidious policy prescription for the economies of Scotland, Wales and the regions. Buried in one of Monday's 18 publications is a proposal that if the economy is performing poorly in one region, the answer is for people to move to another region. That has extremely serious implications for Scotland. It is projected that there will be a decline in the population of 500,000 people during the next 40 years. From the highland clearances, we are now coming to the lowland clearances. That is serious for the continuation of the economy and for the whole nation of Scotland.

That policy prescription goes far beyond Norman Tebbit's "Get on your bike" prescription and threatens yet more people. It is worth noting the exact terms of what is said in the EU labour market flexibility document: Adjustment in the labour market primarily consists of ensuring a smooth transfer of labour out of contracting regions, industries or sectors and into expanding ones. If the unemployment rate in one market segment is high then there are two key mechanisms through which adjustment can take place: either relative wages across these segments can adjust or labour can move. That is, wages can decrease in areas such as Scotland or the people can move to the overheated economy of south-east England.

I have to say to the hon. Member for Cities of London and Westminster that in that scenario, the housing market in London and elsewhere would be even worse. One reason for that housing market is that people in the past have gravitated towards areas such as London where there has been employment, from areas such as Scotland, Wales and northern England, where there has been large-scale unemployment. That has contributed to the problem. If we reach a situation in which higher wages are paid in London, that may exacerbate the problem. In any expanding economy where there is more money coming in through wages, house price inflation is inevitable.

The Minister really must consider that. As I pointed out in an intervention, we are not talking about local pay bargaining. When questioned on regional pay in debate, the Chancellor said: I referred to the maintenance of the national bargaining framework, not to its abolition, but I said that, within the national bargaining framework, we now have to recognise, for example, conditions in London and the south-east, where, because of high inflation or high house prices, the cost of living for workers must be recognised in the wage bargaining formulae that are agreed."—[Official Report, 9 June 2003; Vol. 406, c. 429.] That seems to mean that we will still have national pay bargaining. For example, the firemen may have bargained for 7 per cent. in the first year, but their pay will be based on regional indices. As a result, it will be worth more in London than in Scotland. We will have a differential in the actual pay, if not in pay bargaining. That seems to go against what the hon. Gentleman was saying. It would have serious implications, and it certainly will not help the economy of Scotland.

Adam Price

It may interest the hon. Gentleman to know that that very point was made in the submission made by the Department for Education and Skills to the School Teachers Review Body. It said that far from introducing local flexibility, local or regional pay could create a more rigid system as it would be based on regional cost-of-living indices and other data.

Mr. Weir

That is true, but the issue goes further than that. The suggestion is that regional pay will somehow help recruitment in London. I am sorry to keep referring to the comments of the hon. Member for Cities of London and Westminster—they were of great interest—about the NHS being denuded of staff, but it does not happen only in London. Scotland's health service has serious problems because of a shortage of nurses. During the Scottish elections, which took place in May, the question was raised of whether nurses in Scotland should be paid more so that we were sure of there always being enough. However, if we have regional pay, nurses in Scotland—or policemen and firefighters—will be paid less than those in the booming areas like London, and that will exacerbate the problem.

Even if we have regional indices, the way in which they are drawn will be important. Regions have hot spots, so how can we decide where a boundary should run? I have to say that the hon. Member for East Carmarthen and Dinefwr went much further north than Cowdenbeath. There will be serious problems. For instance, Edinburgh will be a hot spot because of the establishment of the Scottish Parliament, which has resulted in a booming economy, particularly in the housing market.

Although unemployment in Scotland has fallen, we are struggling with a low-wage economy. Under the present Chancellor, the Scottish economy has grown at half the rate of the UK as a whole, which is the worst record since the early days of the unlamented Thatcher Government. According to the Office for National Statistics, Scotland has the highest unemployment rate among the nations of the UK, and the second highest claimant count and the highest unemployment rate among the UK regions.

We are told that the economy in the UK as a whole is growing, but Scotland is teetering on the brink of recession. Although its economy is not booming, like London's, it suffers many of the same problems. The answer is not to cut the wages of workers in Scotland by introducing regional pay. Many of the economic policies followed by the Chancellor have been based on the fact that London and the south-east are overheating, but we should not forget that other regions are not overheating but are facing hard times—in some instances, very hard times.

In many ways, Scottish workers should be paid more to ensure that we keep them in Scotland. We should inject money into the public sector to give us flexibility. The private sector already has some flexibility because of the economic conditions of previous years. However, as the hon. Member for East Carmarthen and Dinefwr said, the fact that regions are side by side can cause problems. For instance, a rail company in north-east England was paying its drivers much more than those working in Scotland. As a result, the Scottish drivers were being lured away, which led to a serious loss of workers on the Scottish railway, a near breakdown in services and a problem with workers' pay.

I was delighted to hear that the hon. Member for Cities of London and Westminster had been converted to the idea that the Scottish Parliament and the Welsh Assembly should have tax-raising powers. I entirely agree. The way forward is not to look at regional pay, but to look at what we might call a third way. Rather than asking valuable public service workers to be paid less or asking people to move away, the Government should give Scotland the powers to compete so that it can grow its economy and give people more opportunity. Growth is the key. If we can grow the Scottish economy and ensure that workers in both the public and private sectors are paid greater rates, the economy will benefit.

Mr. Field

The hon. Gentleman is absolutely right when he says that the issue is about growth. However, tax-raising powers already exist in the Scottish Parliament settlement. Taxes can be raised by as much as 3 per cent. If it were not for the effects of the much discredited and outdated Barnett formula, we could have a level playing field. All 74 London MPs—55 of whom are Labour—would entirely agree with that. We should like to see a level playing field for the moneys that are raised here in the capital and with which we cross-subsidise the rest of the United Kingdom.

Mr. Weir

The hon. Gentleman is following a completely different argument. The regions subsidise London in many ways because most Government Departments and spending are based in London. That is an argument that I will happily have with the hon. Gentleman on another day. As for the tax-raising power of the Scottish Parliament, it is a power to vary taxes. The hon. Gentleman may not know this, but if the Scottish Parliament raises taxes it impacts on the block grant, which means that the increases would have no effect at all.

The Scottish Parliament needs its own tax-raising powers so that money raised in Scotland can go towards dealing with the structural problems of the Scottish economy. Instead of looking at regional pay, we should perhaps be looking at regional taxation and differential business taxation in Scotland that would allow Scottish businesses to grow. Scottish businesses pay the same rate as businesses in central London, but they have nothing like the same economic activity.

As has been mentioned, the Government have provided little detail about the question of regional pay. This seems to have been a political hand-grenade, lobbed into the euro debate for the Chancellor's own reasons. Will the Economic Secretary tell us a little more about exactly what is being proposed and about the time scale for regional pay? We are told that it is part of the preparation for the euro. The Chancellor, or perhaps the Prime Minister, has insisted that it not be ruled out in the current Parliament. Will regional pay indices be introduced within the next two years? How will these regions be set up? Will regional pay be based on Scotland, Wales and the English regions, or does the Chancellor have something else in mind? Has he thought through the hot-spot problems that will occur in each region?

How many of Scotland's 653,000 public sector workers would be affected by the Chancellor's plan? How, when Scotland's economy has grown at only half the rate of the UK under this Labour Parliament, would paying people less in rural communities such as mine in Angus, the highlands and islands and the rest of Tayside help to turn the Scottish economy around? When Scotland relies much more, like Wales and the north of England, on public sector employment to provide economic stability, how will cutting wages and taking the money out of these economies help the economy to grow and make Scotland the place it should be? The answer, of course, is to give the power to the Scottish Parliament. I cannot see the Economic Secretary agreeing to that today, but we will keep at him.

2.59 pm

Mr. David Laws (Yeovil)

I am delighted to take part in the debate. I genuinely thank the hon. Member for East Carmarthen and Dinefwr (Adam Price) for raising the issue and giving us the opportunity to discuss Government policy on it. It is an extremely important matter, with implications for large parts of the United Kingdom, and this is one of the first opportunities that we have had to debate it in detail.

Having commended the hon. Gentleman, I shall, unfortunately, disagree with virtually every point that he made, other than his comments about the need for us all to deal with the structural issues that explain pay differentials across the country. On that matter, there is much common ground. I also wish to raise questions about the Government's policy and to try to flush out a little more detail than we have been provided with of late.

The hon. Member for Angus (Mr. Weir) said that the Chancellor threw a political hand-grenade into the debate when he announced in the Budget that remits for pay review bodies and for public sector workers, including the civil service, will include a stronger local and regional dimension".—[Official Report, 9 April 2003: Vol. 403, c. 283.] There was perhaps a certain amount of briefing to newspapers to hype up the significance of that statement, in order to attract attention to what the Government perceived as a free market initiative in the Budget, which did not have much good news for the business sector or for much of the rest of the country.

It seemed a relatively short time after 9 April that various questions were posed about the Government's policy, not least because the Chancellor was trying to explain that he would hold on to national bargaining while at the same time bringing in a regional element. It will be interesting to see how he manages to do that.

The conflict between those two objectives was highlighted very well only days after the Budget in an article in the Financial Times on 22 April by the reporter Jean Eaglesham: Gordon Brown's Budget call for regional pay awards for public sector workers is unlikely to be realised in practice, Alan Johnson, the employment relations minister, has admitted. Any geographical variations in pay are likely to be very localised, such as specific city weightings. The then Minister for Employment Relations, Industry and the Regions is quoted as saying: I'm pretty sure this won't develop into a regional pay argument, with the government insisting on different pay rates in Yorkshire and Humber to North Lincolnshire, not least because staff will then migrate across the Humber Bridge". I am not sure that I agree with him or his grasp of economics, but he seemed to have a different conception of the Chancellor's intentions than everyone else did. He went on to say that significant regional pay variations would create serious problems and then stated: I don't see the need for anybody falling to the floor sobbing over a discussion document … The issue has been misrepresented. It sounds almost as though there is division between the Chancellor and other Ministers. Such division was highlighted further by a speech by the Secretary of State for Scotland on 16 April. She stated: The part of the Chancellor's speech that set the heather alight in Scotland was the reference to a stronger local and regional dimension for pay review bodies and for public sector workers … The Budget was not about ending national pay bargaining. Absolutely not. What it was about was ensuring that we have more local pay focus"— whatever that means—

to take account of local economic circumstances. By securing the debate, the hon. Member for East Carmarthen and Dinefwr has provided an opportunity for the Economic Secretary to flush out the Government's policy and to explain what appear to be differences between Ministers on the issue. There may even be uncertainty in the Treasury about the matter. When the Chief Secretary to the Treasury was asked in a written parliamentary question on 1 May to explain the policy on regional pay and regional price indices and how it would be implemented in practice, he repeated the statement that the Chancellor had already made and added simply that further details would be announced in the coming months. The Government have a great deal of fleshing out to do in that area.

Adam Price

Does the hon. Gentleman think that the new policy on the posts of Secretary of State for Scotland and Secretary of State for Wales shows the shape of the Government's thinking on regional pay—two jobs for the price of one?

Mr. Laws

I certainly agree that that shows that there is incoherence in the Government. I can agree on that, if the hon. Gentleman will allow me that common ground.

I shall say why the Government are right to head in the direction of more flexibility in pay, even if we are not quite sure what the direction is. To the extent that the Government's policy reflects a desire for more flexibility on pay, whether on a regional or local basis, it is sensible. I favour that for three reasons, with which I would have thought that hon. Members from nationalist parties had some sympathy.

First, the Liberal Democrats favour decentralisation and devolution of decision making. We do not see why there needs to be a rigid national pay system throughout the United Kingdom. We want the regions, nations and local communities to be given more ability to set their own pay rates. We should like that to be based on a system of raising finance locally. That would give the regions, nations and local areas genuine powers to raise their own revenue, so that they were in a position to take those decisions.

The second argument in favour of the Government's move towards greater flexibility is the flipside of the argument advanced by the hon. Member for East Carmarthen and Dinefwr. Such a move is fairer in many cases. It does not seem to have registered with him, if I can put this reasonably and not provocatively, that the unfairness that he thinks the system will introduce exists at present. If very poorly paid workers in London have to pay extremely high housing and other costs, their disposable income may be much lower than that of someone living in another part of the country where the cost pressures are much less. Flexibility will deal with that unfairness in the existing system.

The third reason is that my party favours better public services, and in some parts of the country we cannot have better public services unless we have the staff to man them. It is obvious that in some parts of the country there are quite serious public sector staff shortages. The hon. Member for Cities of London and Westminster (Mr. Field) referred to that. Let us consider the vacancy rates, the data on the proportion of expenditure that goes on agency staff in London compared with the rest of the country, and the economic statistics that explain private sector wage differentials, to which the hon. Member for East Carmarthen and Dinefwr referred. The differences in costs and private sector pay are significant and the shortages of public sector workers that are created in some areas as a consequence are very serious.

Mr. Weir

How does the hon. Gentleman explain the shortages of public sector workers in areas where those pressures do not exist? As I have said, there is a serious shortage of nurses in many areas of Scotland, but not because of the problem that he describes. How does he explain that? It is not purely a London or southern problem.

Mr. Laws

The hon. Gentleman is right to say that it is a problem across regions. Part of that will be due to local labour market conditions, which are tight in many areas of the country because we have a fairly fully employed economy in many areas. The hon. Member for East Carmarthen and Dinefwr referred to some of the other reasons why there might be pay pressures and shortages of key staff in particular areas. I am certainly not arguing that we should not deal with those issues. That is important, but pay is fundamental, too.

I am conscious that I have a limited time to speak, but I want to make a few more points before concluding. We are talking about a number of specific regions. Introducing greater regional flexibility is not likely in practice to mean big differentials between all regions. The hon. Gentleman referred to the paper by Andrew Oswald that compares private sector wage differentials across different parts of the country. It shows that there are particular problems in central London, inner London, outer London and the rest of the south-east, although, as we have discussed, there will be localised problems within regions, which may require action on pay differentials.

I urge the Government to flesh out how the Chancellor's policy will be implemented in practice. They should tell us more about how the regional inflation figures will be produced and whether the data that currently come out of the Office for National Statistics will be changed, owing to the work that is being done on pay. We should also like the Government to say whether they will at some stage give more powers to local areas and to regions to raise revenue, so that they are in a position to fund any pay differentials and to deal with the issues of fairness and scarcity of key employees in public services.

A range of fundamental issues needs to be dealt with if we are to tackle the shortage of public sector employees in certain parts of the country. The length of this debate does not allow us to discuss those issues, but the Government are right to examine flexibility at local and regional levels, in order to deal with the problems in public services in some parts of the country. The Government also need to deal with the issue of fairness for many workers.

3.10 pm

Mr. Howard Flight (Arundel and South Downs)

I congratulate the hon. Member for East Carmarthen and Dinefwr (Adam Price) on securing the debate. It is on important territory, so I am surprised that there are apparently no Labour Members here other than the Economic Secretary.

At the heart of the matter is the question of what the Government's agenda is. In his Budget speech, the Chancellor announced that he was planning to introduce regional price indices that would demonstrate differences in regional inflation rates. He said that the economy was better placed to recognise local and regional conditions in pay, such as the extra costs for retention and recruitment that arise in London and the south-east, especially for the low-paid. He added that the remits for pay review bodies and for public sector workers, including the civil service, will include a stronger local and regional dimension".—[Official Report, 9 April 2003; Vol. 403, c. 283.] If he did not intend to go beyond such things as regional and London weightings, why say that? It is not at all clear what the Government are looking to change. Major differences have been pointed out between local and regional pay arrangements. The public sector unions registered pretty considerable opposition at first, at least to what they thought they heard.

As a matter of principle, it is entirely correct that part of the programme of improving delivery of public services involves greater employment flexibility of terms of employment and pay. However, that did not seem to be the Chancellor's agenda. The spending review last year stated that pay must also be allowed to vary at the local level, according to local pressures. In the private sector pay differentials of up to 50 per cent. exist between different parts of the country. Unless public sector organisations take these differentials into account, service quality will be at risk and both employees and service users in large parts of the country will suffer.' Is that the basis on which the Government seek to move forward?

If one looks at the current state of play in public sector pay, it becomes clear that the Government's initiatives to move away from national pay structures—if that is in fact their objective—will be fought tooth and nail by public sector unions. How does the national health "Agenda for Change" reflect the Chancellor's announcement? What progress is being made in the light of the announcement that foundation hospitals cannot vary their pay if that leads to poaching from the rest of the health service? The proposed pay reform for the national health service agenda is still to be agreed and implemented, but it is firmly based on the new national grading structure, which took several years to draw up.

The pay commission on local government will no doubt listen to what the Treasury says. There is a single national pay scale that resulted from the 1997 agreement, with the possibility of setting pay flexibility in relation the national structure. Does the Chancellor want to change that arrangement for local government?

Adam Price

Does the hon. Gentleman agree that there is a contradiction in the Government's policy on foundation hospitals? Surely the only purpose of giving foundation hospital trusts autonomy on local pay is to attract key staff from other areas.

Mr. Flight

That is precisely the point. Indeed, the debate that is warming up has strong parallels with the debate on foundation hospitals, in that one is either on one side or the other. We all heard the Chancellor make comments in which he took one side, but then he tried to back-pedal. As the hon. Member for East Carmarthen and Dinefwr says, the situation with foundation hospitals illustrates the point.

It goes on, however. Last autumn, the then Secretary of State for Education wrote to the School Teachers Review Body asking it to consider the implications of more pay differentiation by location and subject. What was the reply? What is the Government's intention as regards local pay differentials for teachers? The catastrophe of the grant arrangements certainly made the situation in my constituency worse, and there is a shortage of teachers. Now many redundancies are having to be made because people have got the pay issue wrong.

Against the Government's vague commitment stand the public sector unions. A national pay framework remains their strong policy. They have certainly indicated that, as the Labour party's paymasters, they will fight on the issue. The Minister for Lifelong Learning, Further and Higher Education, who formerly had ministerial responsibility for employment relations, is a perennial friend of the unions and was on hand to placate the Government's paymasters. He was quoted as saying:

I'm pretty sure this won't develop into a regional pay argument, with the government insisting on different pay rates in Yorkshire and Humber to North Lincolnshire, not least because staff will then migrate across the Humber Bridge". In the post-Budget-debate spinning, the Chancellor appeared to backtrack to reassure the unions that he was not attacking national pay bargaining, which is one of their most potent weapons. Are the Government deceiving the unions or the public about their intentions? Indeed, I repeat: what are their intentions? The debate gives them the opportunity unequivocally to put their plans and proposals on the record.

In his Budget speech and in the euro debates, the Chancellor told us that he wanted to move towards a more flexible form of pay bargaining; but his calls for local and regional pay review bodies were quickly undermined in briefings by junior colleagues after the backlash from the unions. Was the Government's intention on local and regional pay misreported or has there been an enforced backtrack? When will further details of the Government's proposals be made available? How do the Government think that things should work out in practice?

Very speedily, I shall go through some specific points. Can the Government ensure that local pay rates stay local and do not degenerate into rigid regional or, in the case of schools, LEA-determined pay scales? Is the Government's approach local or regional? Have they considered the fact that the spread of more and less affluent areas is often as diverse within regions as it is nationally?

To conclude, local pay bargaining is the norm in the private sector, and there are obvious arguments for having parallel market flexibility. However, there is a great gap between the Chancellor's rhetoric and the reality. The hon. Member for East Carmarthen and Dinefwr might have put his finger on it when he said that the Chancellor's real objective might simply be to restrain the dangerous and accelerating rate of inflation in the public sector, which is up from 1.5 per cent. per annum in 1997 to well over 5 per cent. now. On the other hand, was the Chancellor popping in a poison pill as part of the euro debate, as the hon. Member for Angus (Mr. Weir) suggested? Please could the Economic Secretary enlighten us as to precisely what the Government's objectives are?

3.19 pm

The Economic Secretary to the Treasury (John Healey)

I congratulate the hon. Member for East Carmarthen and Dinefwr (Adam Price) on securing the debate, and thank him for giving us the opportunity to discuss what all contributors have agreed is an important matter. I also congratulate the hon. Gentleman on approaching a serious subject in a largely—if not entirely—measured way. He said that Government policy was ill conceived, short-sighted and based on false premises. I will demonstrate that the contrary is true.

However, before I do so, I should say that I find it curious—I put it no more strongly—that a Welsh separatist should argue a centralist UK principle. A pro-public sector MP who has called for something distinctive to offer nurses and other professions in the NHS in Wales to tackle recruitment and retention problems is condemning a policy and an approach that will deliver just that. It is also curious that a pro-euro party should oppose the greater market flexibility that is necessary if the UK is to prosper within the European monetary union, as well as being the right thing for Britain, in or out of the euro.

Adam Price

Briefly, I am in favour of any policy that leads to public sector workers in Wales being paid more. I am opposed to any policy that leads to their being paid less.

John Healey

May I say to the hon. Member for Cities of London and Westminster (Mr. Field)—[Laughter.] Well, if the hon. Member for East Carmarthen and Dinefwr bears with me, he will see that many of the fears that he has are ill conceived and based on false premises, and will not be fulfilled.

I say to the hon. Member for Cities of London and Westminster that I do not feel beleaguered on all sides in this debate, but if I did, it would not be the first time. I was interested to note that he described himself as a part of an unholy alliance on this issue.

Mr. Field

In the midst of the other comments that were made by the hon. Member for East Carmarthen and Dinefwr in introducing the debate, there was one phrase that the Minister decided to ignore. That was the accusation that Labour's policy was the product of sloppy thinking.

John Healey

I hope that the hon. Member for East Carmarthen and Dinefwr will suspend that judgment for at least another eight minutes so that I have a chance to say some of what I should like to say.

The hon. Member for Yeovil (Mr. Laws) invited me to flush out the policy. I will try to do just that. The hon. Member for Arundel and South Downs (Mr. Flight) asked me to do something similar. He asked what the Government's agenda was on this matter. I welcome the fact that the hon. Member for Yeovil sees the direction of the policy as sensible and that the hon. Member for Arundel and South Downs sees that it is, at least in principle, entirely correct.

Hon. Members are aware of the context of the Chancellor's announcement that, by next year, almost all pay remits for public sector workers will include a local pay element. As part of the last year's spending review, we undertook and published a cross-cutting review of the public sector labour market. That is hardly, as the hon. Member for East Carmarthen and Dinefwr described it, an oblique reference in the spending review, and it should not have been a hand-grenade surprise to the hon. Member for Yeovil nine months later, in the Chancellor's Budget speech this year.

That review identified the need to increase the flexibility and responsiveness of pay and conditions in the public sector. In particular, the review emphasised that labour market conditions vary significantly within regions, as well as between them. As I said to hon. Members in the House this afternoon, if we are to pursue full employment, stronger growth and improved productivity in every region and nation across the UK, our policies need to take account of those labour market variations at a local level.

The purpose of reform is twofold. First and foremost, it is about improving public services. Last year's spending review set tough targets for public services to ensure that our programme of unprecedented investment is matched by reform and modernisation of working practices, so that we see the benefit of that investment reaching service users—patients, pupils and citizens. No matter what investment and organisational reforms we put into the system, we must be clear in our mind that, in the end, the public sector workers are central to delivering those services, so we need to ensure that we are in a position to recruit, retain and motivate the staff necessary to deliver those services in every area to meet our commitment.

Secondly, a responsive and flexible public sector labour market is necessary for the wider economy. The public sector accounts for around a fifth of the economy, and for the sake of flexibility, we cannot allow it to lag behind the private sector. Barriers that obstruct staff and their skills and prevent them from moving to where they are most needed impose rigidities and adversely affect the economy by restricting the potential for growth and employment.

We must, however, be equally clear about what the policy is not designed to do. It is not about cutting public sector pay, but about ensuring that the public sector has the flexibility to respond to the circumstances in every area in which it operates. The Chancellor has already made it clear, and I reaffirm, that national pay bargaining will continue. We remain firmly committed to a system that is fair. It is also important to be clear that the policy is not only about pay. As the hon. Member for East Carmarthen and Dinefwr rightly said, there are many other significant elements to labour market flexibility.

A recent report by the Audit Commission emphasised the other factors that need to be addressed. Neither is the policy about a principle that is without precedent: the approach is already established, negotiated, agreed and operated by trade unions and public sector workers. The hon. Member for Angus (Mr. Weir) asked me for details of that approach. I ask him to consider the areas in which we are already putting it into practice: the NHS "Agenda for Change"; the local government agreements, including single status; and four pay zones in the Prison Service, which cover the United Kingdom. Those are all tailored to service needs. They all provide for local flexibility within a national framework, and all target recruitment and retention problems, not just pay. They are all negotiated and agreed by public service unions or the existing pay review bodies.

The hon. Member for Arundel and South Downs specifically asked about the NHS "Agenda for Change". The agenda covers more than 1 million NHS workers, from non-clinical staff and nurses to other health professionals. All the relevant unions have negotiated and signed up to the agreement in the past three weeks. It is based on a national grading system, with role evaluation and pay protection arrangements for staff whose roles fare less well in job evaluation. Its pay progression is linked to skills and to taking on new roles.

Harmonised high cost supplements will be available in London and, for the first time, staff in the fringe zone of London will be entitled to an extra 5 per cent. supplement. I must tell the hon. Member for Cities of London and Westminster that the new arrangements are significantly more generous than the old system and will ensure that the NHS can be full staffed in the capital. There will, however, be flexibility to introduce recruitment and retention premiums in the short term and long term for any location or specialism experiencing particular recruitment and retention difficulties anywhere in England or Wales, or in Scotland, depending on the Scottish Executive. London is the most obvious and pressing problem. The policy is not confined to London and the south-east: it is not designed to meet the problems only of London and the south-east.

Let me restate the Chancellor's central point. We are determined that fairness will not be undermined in the new system. The national minimum wage and the national tax credit provide a national guarantee. Beyond this framework and in national arrangements, it makes sense to recognise that a more considered approach to local and regional conditions in pay and to other labour market issues offers the best modern route to full employment. Therefore, from this year, the remits for pay review bodies will be amended to ensure that proper consideration is given to regional and local dimensions. For next year, we shall also increase the weight given to the regional and local dimensions in the arrangements for settling civil service pay.

As we take matters forward, we need to think carefully and pragmatically about how the public sector can evolve in a way that best enables us to deliver improved public services and to ensure that the system treats public service employees fairly and gives greater flexibility to the whole economy. I stress that pay is not the only component in tackling the obstacles to recruitment and retention in the public sector, but it is an undeniably important factor. We will continue to work with all stakeholders and that work will not be rushed. We will analyse the current flexibilities in public sector pay and ways of developing them further to meet the needs of the public services, the wider economy and our central objective as a Labour Government of pursuing full employment in every region and every nation of the United Kingdom.