The Institute for Fiscal Studies has warned that departments will have to choose between offering staff pay rises that fall well below inflation , making significant job cuts, or allowing services to deteriorate in the wake of the government’s Autumn Statement.
Public pay setting will “remain one of the biggest challenges facing this government over the rest of this year and into the rest of the period up until the next election”, IFS director Paul Johnson said in a video analysis of the Autumn Statement this morning.
Johnson said the government will not be able to fund pay rises in the public sector that are “anywhere near” to inflation within the spending budgets announced yesterday unless there are big job cuts.
The only other option that would allow inflation-matching public sector rises would be cuts that reduce service quality, Ben Zaranko, a senior research economist at the IFS, added.
Plans for 91,000 job cuts were scrapped earlier this month while reports have suggested civil servants could see their pay rises capped at 2% next year.
In the Autumn Statement, chancellor Jeremy Hunt announced that increases in departmental budgets planned in the 2021 Spending Review would be kept in cash terms, predicting this would mean a 1% real terms increase in spending power up until 2025.
Paul Johnson said the public spending budgets over the next few years “don’t look too bad”.
But the IFS warned that the government’s use of the GDP deflator, which puts inflation right now at 5%, rather than the Consumer Price Index, which has inflation at 11.1%, hides big decisions the government will have to make on pay awards.
“There are very good reasons to think that that measure of inflation [the GDP deflator], while perhaps the best one we have [to determine real-terms increases in public spending], isn’t going to perfectly capture cost pressures on public services,” Zaranko said.
“There are particular challenges around pay awards. The GDP deflator next year is expected to be about 3%, CPI about 5.5%. So if government departments offer inflation matching pay awards to their to their workers that's clearly going to exceed the cost pressures that would be suggested.”
Civil servants have been given pay rises of 2-3% this year, while some public sector workers, such as teachers and nurses, have been offered significantly higher pay increases, but none have come close to CPI inflation.
In response to pay offers lagging well behind CPI, as well as concerns over terms and conditions, public sector workers across the country have signalled their intention to strike this year, with around 100,000 civil servants recently voting to take industrial action.
"The fact that nurses, teachers and so on are balloting for strike action is an indication of the scale of that problem,” Johnson said.
Post-2025 public spending ‘will be higher than planned’
Johnson also warned that public spending plans announced beyond the next few years “should be taken with a very large pinch of salt”.
“After all, they are spending pencilled in for after the next election,” he added.
From 2025, day-to-day spending will be increased by 1% a year, under Hunt’s plan, meaning cuts for some but not all departments, while capital spending will be hit with a cash freeze, meaning less money in real-terms for capital projects.
At the last four spending reviews, the actual expenditure was on average 3.7% higher than the amount earmarked.
“I have to say it's unlikely that they will actually be kept to,” Johnson said. “I'd be willing to wager quite a considerable sum that spending will turn out higher than planned. It literally always does. If it does and the forecasts are right, that would imply either more taxes or more borrowing alongside it.”