Why has the Chancellor jumped the gun of an independent review?

The budget leak about introducing more localised pay-setting for civil servants in a number of government departments is not a great surprise. The Treasury has been toying with regional pay issues since the IFS reported that earnings are 10 per cent higher for men and 15 per cent for women in the public sector in Wales, Scotland and Northern Ireland.

What is surprising is that such an announcement should pre-empt the findings of the Independent Pay Review Bodies' review, commissioned by Mr Osborne, which is due in July. If the Chancellor is to jump the gun in this way then he needs to address four big questions.

1) Is there evidence that public sector pay rates have a direct effect on private sector wages and job creation in regional economies?

While few dispute evidence of a pay gap, changing the current system would appear to be based upon the principal assertion that high public sector pay rates in weaker local economies are making it difficult for private sector companies to recruit staff. It is not difficult to find disgruntled employers who are prepared to endorse this line of thinking but policy by anecdote is a dangerous business and there is no substantive evidence that this is the case.

What limited evidence there is on the impact of public-private pay gaps - an LSE report on the impact of pay differentials on hospital performance - highlights pay effects on depressing performance in high wage areas, but this is an altogether different argument.

2) Will the pay gap will close without further government intervention?

In his first budget as Chancellor, George Osborne announced a public sector pay freeze which he has subsequently extended to last over three years. In preliminary analysis carried out by IPPR North, this in itself would appear to be sufficient to close the gap by 2015. If the government needs to embolden its approach then it must provide evidence that additional measures are needed above and beyond the pay freeze already announced.

3) Has the Chancellor screened out a raft of unintended consequences?

Perhaps the greatest concern about reducing public sector pay is the risk of depressing weaker economies still further. The government's argument that public sector jobs were crowding out the private sector is looking increasingly flawed as Northern economies experience a double dip jobs recession and unemployment touches 10 per cent across the North.

In fact, public sector cuts have hit the public and the private economy hard and what is needed is stimulus not further constraint. Furthermore, squeezing pay risks a race to the bottom which ultimately undermines productivity and reduces the competitivity of Northern economies exacerbating the North-South divide.

4) If localising pay is such a good idea, then why are private companies doing the reverse?

In one of the more interesting interventions on this debate, the Incomes Data Services have produced a report looking at the use of regional and local pay by the private sector. They find that the only real regional pay variations that exist are between London and the South East and the rest of the country.

Furthermore, aside from housing costs in the Greater South East, the cost of living across the country is converging. For this reason, most large national and multi-national private sector companies are moving away from complex regional, zonal and local pay structures which breed resentment and reduce productivity, in favour of simpler systems which top-up London pay.

If the Chancellor is serious about stimulating growth in less prosperous places then perhaps he should look to grow investment and productivity outside London rather than precipitate a race to the bottom in places that are poor enough already.

Ed Cox is Director of IPPR North