By Max Clarke

4.4 million Public Sector staff were paid an estimated £164 billion, or some 23% of total government expenditure. Half a million of these worked directly for central government as the Civil Service, at a cost of £16.4 billion, with 25% earning in excess of £30,000 a year, according to the latest report from the National Audit Office.

“Given the state of the public finances, the Government really needs to get a better grip on staff costs” commented, CBI Head of Public Services Policy, Emma Watkins.

“Despite introducing a two-year pay freeze and moving towards performance-related pay, salaries have continued to rise in central government. Simply creating new posts or promoting people to get around the pay freeze will do little to help plug the deficit.” Continued Watkins.

The growth in central government staff costs is largely the result of an unplanned increase in the number of staff in higher grades. Between March 2001 and March 2010, the number of administrative grade staff declined. But all higher grades grew in number, with Civil Service management grades 6 and 7 showing a 67 per cent increase (around 14,000 posts). The NAO estimates that this change in grade mix accounts directly for approximately 50 per cent of the staffing cost increase.

Amyas Morse, head of the National Audit Office, said today:

"Work to identify potential savings in central government's staffing costs has begun, but there are a number of areas of weakness.

"Increasing numbers of higher grade posts have led to much of the recent cost growth. The centre of government needs to review its ability to understand and challenge these management decisions. There is also a lack of a structured approach to delivering the staff cost reduction required across government in the next Spending Review period.

"If these areas of weakness are not dealt with, real risks to value for money remain."

The NAO estimates that 35 per cent of the real terms increase in staff costs is due to increases in salaries and performance-related pay. Performance-related pay has increased from virtually zero in 2000-01 to around £200 million in 2009-10, forming around one per cent of the total pay bill.

The scale of staff cost reductions is unlikely to be achieved by natural turnover alone. Despite proposed changes to the Civil Service Compensation Scheme, the up-front costs of voluntary or compulsory redundancy schemes and early retirements will be significant.