Government was again urged to lift the public sector pay cap today, after analysis showed the Treasury would recoup more than 40% of the total cost of a pay rise matching inflation in additional tax revenue and a smaller benefits bill.
The IPPR think tank found that a pay rise in line with inflation would almost immediately return £2.5bn to public coffers as workers would pay more in taxes, receive less in means-tested benefits and spend more in the economy.
According to its research, raising pay in 2019-20 by 3% across the public sector would cost government £5.8bn, above the projected pay bill if the current 1% cap remains in place.
But the total cost of the policy to end wage restraint would be just £3.3bn once tax receipts and benefits were taken into account.
Prime minister Theresa May has been under increasing pressure to end wage restraint in the public sector since she was returned to office with a minority government following the 2017 general election.
Chancellor Philip Hammond is expected to make an announcement on pay in his Budget next week, and the Treasury has already signalled to pay review bodies, including the Senior Salaries Review Board which covers senior civil servants, that it is prepared to be more flexible on pay next year.
But many are still concerned that Treasury will refuse to stump up the cash for a pay rise, with the first cap-busting pay rises for police and prison officers having to be funded from within existing budgets.
The IPPR report was critical of the UK’s economic model, which has seen public sector weekly earnings last year fall to 4.1% below their level in 2010-11, the year before the pay cap came into effect.
If pay remains capped, earnings will be 6.2% below 2010-11 levels in real terms by 2019-20.
“The focus of government economic policy must now be to raise pay and productivity across the entire economy, and it is critical that the public sector is not left behind,” said the think tank.
It added that raising pay was “not a silver bullet” to the UK’s economic woes, but “stands alongside welfare reform and boosting private sector productivity and earnings through industrial strategy as a key part of the response”.
IPPR added that recruiting and retaining a skilled workforce in the public sector was crucial.
“The government’s pay cap policy, and their refusal to fund the cost of any pay rise of above 1%, has effectively constrained both the operation of pay review bodies and the collective bargaining process between employers and unions in recent years.
“The government should scrap the public sector pay cap and restore the independence and credibility of the public sector pay-setting process. It should review its guidance to pay review bodies and to public sector employers, making clear that it will not arbitrarily limit the funding available for any pay rise.”
The think tank also modelled the impact of a public sector pay increase of 1% above private sector earnings. This would cost £12.7bn in 2019-20, a figure reduced to £7.2bn once taxes, benefits and economic growth are taken into account.