IFS's third annual Scottish Budget report, ‘Scottish public sector employment and pay', reveals that between 2019 and 2024 public sector pay rose by 5% in Scotland, compared with no change in the UK as a whole.

As a result, public sector workers in Scotland now have a considerable pay premium relative to their counterparts in the rest of the UK. A newly qualified nurse earns £31,892 in Scotland compared with £29,970 in most of England.

The report also looks at trends in public sector employment in Scotland:

• Around 590,000 people are employed in the public sector, representing 22% of the Scottish workforce. This fraction is lower than in Wales (24%) and Northern Ireland (26%), but considerably higher than in England (17%), and higher than in any English region.
• Public sector employment has risen by 56,000 since 2017 (11%). Over that period, as a share of the workforce, public sector employment has grown faster in Scotland than in any other region or nation of the UK with the exception of Wales.

The report finds that prioritising public sector pay is a ‘reasonable choice' that Scottish policymakers have made, especially as there have been challenges recruiting and retaining staff in some public sector occupations elsewhere in the UK. However, with a paybill of £27bn a year in Scotland, making up more than half of all devolved day-to-day spending, higher pay poses an increasing financial challenge for the Scottish Government.

Therefore the Scottish Government needs to find the money for pay increases for its bigger and better-paid workforce from its own devolved revenues and/or less spending elsewhere.

In addition, the report says it is unclear what the benefits of higher public sector pay may have been. The Scottish public sector retains more of its workforce than happens in England, but that gap has actually been narrowing as public sector pay has risen in Scotland relative to England. While factors other than pay may have affected recruitment, this means there is no obvious evidence that larger increases in pay in Scotland have helped retain workers. There may well be positive effects on recruitment or motivation, although the data available to us unfortunately do not allow us to examine these.

Jonathan Cribb, an associate director at IFS and an author of the report, 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.

‘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.'