Public sector: economic overview

Summary

Purpose

This analytical note brings together key economic data and analysis in relation to the public sector in Scotland, covering both its size and pay levels. It considers how the size and employment in the public sector has changed over time and how it compares to other parts of the UK and internationally. The report is an economic overview and does not consider the level or quality of public services that are provided in Scotland, and how this is changing over time.

The size of the public sector

The size and composition of any country’s public sector reflects choices on the delivery of public goods and services. Within Scotland and the UK, a number of important services are delivered by the public sector, such as healthcare and education. These services are delivered in the private sector in some other countries, which makes direct international comparisons difficult.

In recent years, the public sector has been growing in both Scotland and the UK. The UK public sector employment has increased by around 140,000 over the last year to 5.9 million, to account for 17.5% of total employment. In headcount terms, the UK public sector is now the largest it has been since records began in 1999, and as a share of total employment it is the largest since 2013. This primarily reflects growth in the size of the NHS.

The public sector in Scotland is larger than the UK, whether measured by employment, a share of GVA, or public spending as a share of the economy. This is something which has been persistent over time. The public sector is also larger than any part of England, although it is smaller than Wales and Northern Ireland. However, Scotland is mid‑range relative to other small advanced economies. Total public sector employment headcount has increased to around 600,000, similar to the level between 2005 and 2008. It now accounts for around 22% of total employment, the highest share since 2010.

Internationally, there does not appear to be a clear relationship between the size of the public sector and performance of the economy. This suggests that productivity and efficiency are at least as important factors as size.

Public sector pay

As well as being larger, the public sector in Scotland is also relatively better paid than the UK average. After taxes, the average full-time public sector employee in Scotland earns around £1,500 a year more than the UK average. This gap has risen from around £400 prior to the pandemic. Looking across the UK, average public sector pay is higher in Scotland than any other part of the UK other than London.

In both Scotland and the UK, the average public sector employee is higher paid than the private sector. At the UK level, this gap is mostly explained by differences in age, experience, and qualifications, although at the Scotland level this is not the case. Unlike the UK, the gap between average pay for public sector employees and private sector employees has also been widening over time in Scotland.

Gender and income distribution differences

The public sector is an important employer of females. In 2023, over 60% of people in employment in the public sector in Scotland were female, compared to 44% in the private sector. On average, the gap between pay for public sector and private sector employees is also larger for females than males.

There are notable differences in female employment across Scottish local authorities. Although in all local authority areas females make up more than 40% of public sector employment, this figure rises to in excess of 73% in Stirling and Clackmannanshire.

The differences between public and private sector pay also vary across the income distribution. In general, employees in the bottom half of the income distribution earn around 20% more in the public sector than in the private sector, with employees at the top of the income distribution earning more in the private sector. A more generous pay offer to lower earners also helps explain the difference in average wages between Scotland and the UK.

Concluding comments

The analysis highlights that the public sector in Scotland is on average larger and better paid than the public sector in the rest of UK. It also notes that the size of the public sector and the gap between public and private sector pay has increased in recent years and considers how pay varies by gender and between high and low earners. Public sector productivity has been broadly flat in Scotland over the last two decades.

Historically, Scotland has had a larger public sector than the UK across a range of measures. Part of this reflects differences in way that public services are delivered, although it is difficult to produce robust comparisons of these differences. The larger size of the public sector in Scotland is reflected in a range of other economic statistics, with public spending generally higher in Scotland than other parts of the UK, and the public sector accounting for a larger share of the economy.

The fact that the public sector is both larger and better paid in Scotland has important implications for the Scottish Government, with the paybill now accounting for £25 billion, or over 50% of the Scottish Government resource budget. Part of the funding the Scottish Government receives is based on the size of additional spending for UK public sector pay deals. However, with relatively more public sector workers in Scotland, as well as higher average pay, matching a UK pay deal in Scotland will typically cost more than the funding received. This highlights the importance of improving public sector productivity in a challenging fiscal context.

Office of the Chief Economic Adviser