Why public sector workers face bigger debts

Public sector workers are suffering from a pay squeeze that makes it hard to them to cope with debt.

Initially in receipt of higher pay rises than their private sector counterparts in the wake of the financial crisis, that trend reversed in 2010 when companies began to increase wages. Both still suffered pay falls in real terms.

Civil servants, teachers, nurses, and police officers received more bad news in last year’s Budget. The chancellor, George Osborne, announced that public sector pay rises would be capped at 1% a year for the next four years. Some 5.3 million public sector workers, including council staff, will suffer a pay cut taking inflation into account every year until 2020.

Government squeeze

The government’s tight control of public sector pay is hurting people’s ability to manage their finances. Research into the payday lending industry shows that public sector workers are among the highest users of these loans, with interest rates of 1,000% plus APR. 

Quick Loans, a payday lender, reported a quadrupling of applications in loans in the last five years from public sectors employees. The armed forces, NHS and councils are in the top 10 groups who use payday loans across all industries, according to Quick Loans.

Middle-to-lower earners usually have to pay more for loans than those on higher incomes, who typically have better credit scores which lead to lower interest rates. One in three employees spend between a fifth and a half of their income on debt repayments, making it hard for them to get out of debt and save. 

Impacting performance

Employees are increasingly reporting that money worries impact their performance at work. Yet it is hard for employers to understand the financial health of their employees, who often don’t feel comfortable discussing their money concerns at work.

Public sector employers face specific challenges. They are committed to paying workers the living wage, but this can make it harder to admit that staff are in financial difficulty.

Individual public sector employers are often unable to address financial issues because they have to react to a cycle of annual pay bargaining at national level, with unions often setting the agenda.

Welfare issues caused by low pay quickly become front page news and are seen as a problem that politicians should address, rather than as something that individual public sector employers can do something about.

Tough challenge for HR

Spending cuts have made public sector employers too stretched to deliver organisational development initiatives. More urgent needs, such as pay scale reviews to accommodate the national living wage, make addressing hardship a lower priority for over-stretched HR departments. Scrutiny of budgets means spending public money on staff initiatives is sensitive.

As financial wellness continues to be a focal point of the HR and Benefits communities, attention must be paid to the challenges debt presents to public sector employers and employees.

Verity Buck is client director at SalaryFinance.

This article was provided by SalaryFinance.