Pay may reflect regional living costs

Cost of living for Londoners nearly a fifth higher than for Geordies, says ONS survey

It won't come as a surprise to any Londoner who has ever needed a plumber, but the cost of living in the capital is up to a fifth higher than in the provinces. Ground-breaking research by the Government's Office for National Statistics confirmed that, as with growth, house prices and employment, there is a deep North-South divide in inflation rates.

It won't come as a surprise to any Londoner who has ever needed a plumber, but the cost of living in the capital is up to a fifth higher than in the provinces. Ground-breaking research by the Government's Office for National Statistics confirmed that, as with growth, house prices and employment, there is a deep North-South divide in inflation rates.

A Londoner has to pay almost 8 per cent more than the average Briton for the same basket of goods and services, while a Geordie gets away with a 10 per cent smaller budget - a gulf of 18 percentage points.

A shining example is the notorious case of six City of London investment bankers who racked up £44,000 on wine during a meal in Petrus restaurant to celebrate a deal (the food was thrown in free).

The real villain in the piece is, however, housing where costs in London are 18 per cent higher than the rest of the UK but 37 per cent cheaper in Northern Ireland. This is a cause of much anger in regions especially when, as happened last week, the Bank of England raised interest rates to tackle strength in the housing market.

Catering costs - as the Petrus example highlights - are another divisive issue with the bill in the capital coming in 12 per cent higher than in the North-east. A pint of beer is likely to cost 15 per cent more. Interestingly globalisation has kept the prices of goods - everything from food to DVD players - relatively even across the UK. A packet of cigarettes, for example, does not vary more than 2 per cent across the country. London is not always the most expensive. East Anglia has the priciest clothes while utility bills are highest in the more remote regions of Northern Ireland, Scotland and the West Country.

So far, so interesting - but what does it mean? The significance is that context in which the research was carried out.

Gordon Brown, the Chancellor, commissioned it in this year's Budget as part of a drive to tackle inequalities across British regions. He said the economy needed "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". He went on to warn that remits for pay review bodies and public sector workers, including the civil service, would include a "stronger local and regional dimension". The announcement was greeted with shock and anger by public sector trade unions who accused the Government of proposing different pay levels for different regions.

They threatened to call a national strike if ministers abolished UK-wide pay settlements. Meanwhile, the Treasury has commissioned studies into the feasibility of moving 20,000 civil servants out of London and into improving statistics into regional economies. Both will be published around next month's pre-Budget Report.

Stephen Bevan, the director of research from the Work Foundation think tank, said it was hardly surprising that unions - and even some regional public sector employers - were perturbed. "These figures will reignite some of the fear that unions and some employers have over local bargaining because it is clear that many managers in the public sector have no experience in pay bargaining," he said. When it was tried in the NHS some years ago the unions, with their greater network, were able to outflank local managers to extract better deals," he said. The same phenomenon occurred in the railways after privatisation where unions exploited the end of national pay bargaining for train drivers to play each of the new 26 operating companies off against each other.

Andrew Oswald, professor of economics at Warwick University, believes the Government should carry out what the unions fear and install local pay bargaining. "It is absolutely essential that we let public sector pay vary more area by area because a pound in London does not buy the same as a pound in Tyneside," he said.

But Alastair Hatchett, reports editor at Incomes Data Services and an opponent of local pay bargaining, believes the argument has been settled within the Treasury. "Two years ago the Treasury line was that the public sector should seek much greater variation at a local level, largely because the econometricians were saying local earnings figures showed what was appropriate," he said. "But we looked at multi-site firms that were a proxy for schools and they had a national pay structure from which they have variations based on a zonal system."

This meant that a supermarket in Reading or Basingstoke, which has full employment, could be lifted into the London "zone" without having to alter the pay for the whole county. Mr Hatchett said this was already being rolled out in the public sector with £6,000 allowances for police officers in London, inner and outer London pay spines for teachers and proposals for the NHS.

This leaves the civil service and, in particular, those at the lower end of the pay scale such as workers in the postal and fire services, whose anger has become obvious in recent weeks. "The debate is no longer about regions, it is about recruitment and retention of staff and how to resolve that," he said.

For instance, while lower costs of living in the North-east might justify lower pay, the cost of replacing a key worker such as an experienced nurse in a remote area is much higher than in London. A spokesman for the Treasury said pay settlements had been devolved to departments. "Within that there has been a lot of mood music from the Treasury that there is a regional issue here," a spokesman said. "While we think it is important wage increases are sustained by productivity there needs to be flexibility for local services providers to use discretion on pay to deal with problems of recruitment and retention.

"We recognise that recruiting a nurse in the North-east on a certain wage will not be as difficult as in the South-east."

The key question is how these increases will be paid for. The Treasury insisted this was not about cutting pay in the North but said it was "hard to argue with the logic" that within a fixed budget extra money for London and the South-east must mean less for elsewhere.

Mr Bevan said the debate now centred on allowing local managers to offer temporary supplements to fill the gap.

He said the problem was how to prevent these supplements being permanently consolidated into pay rates when the problem went away or people changed jobs. "The key is to make sure that they are time limited - and that this is made clear to the applicant," he said.

Neil Blake, head of research at Business Strategies Experian, said that over a long time it was possible to lower pay in some areas by not replacing senior posts while directing resources in areas of skills shortages. But he warned this created a vicious circle as lower pay levels made it harder for the public sector to compete with private firms. Another irony is that high wages in London are a reason for higher inflation as wealth inevitably weakens a willingness to haggle. Between 1979 and 1995 London male full-time wages rose 57 per cent compared with 35 per cent in the UK as a whole. But not every Londoner is a banker and one in eight families was living on less than a £100 a week in 1999. Mr Hatchett said: "It is the lower pay groups in London who are losing out and the result for them is a higher cost of living."