Money 'will have to be found from somewhere' for public sector pay rises – IFS

Government will need to stump up at least £11.5bn to keep pay rises in line with private sector, Hunt warned after Spring Budget
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By Tevye Markson

16 Mar 2023

The government will need to stump up at least £11.5bn to keep public sector pay rises in line with private sector growth, according to the Institute for Fiscal Studies.

Yesterday’s Spring Budget coincided with a day of widespread strikes over pay, including up to 150,000 civil servants, along with teachers, junior doctors and Transport for London staff. But chancelor Jeremy Hunt announced no extra money for public sector wage increases.

IFS director Paul Johnson said money "will have to be found from somewhere" to fund pay increases.

In a post-budget briefing this morning,  he said it is “simply implausible that there will not be extra money available” for public sector workers.

“You cannot keep cutting the pay of teachers, nurses and civil servants, both in real terms and relative to the private sector, without consequences for recruitment, retention, service delivery, morale, and, as we've seen yesterday and today, strikes,” Johnson said. 

Carl Emmerson, deputy director of the IFS, said the government would need to find between £2.5bn and £5bn to match the private sector growth in wages predicted in 2023-24 and an additional £9bn to close the gap from this year.

Similarly, the Resolution Foundation has said £2.5bn would be needed for public sector pay to keep pace with private sector wage growth. Public servants has gone from having a 1% premium over similar private sector employees – and around 5% in previous years – to a 1% deficit since the pandemic, according to the think tank's calculations.

Government could 'dig into reserves'

The IFS suggested hacking at the government’s £14bn in reserves to find money for pay boosts, suggesting non-consolidated pay awards might be the best option.

"Consolidated public sector pay awards might be difficult, they're going to be permanent, they're going to add spending pressures on an ongoing basis," Emmerson said.

“If we wanted to fund some backdated awards, or some one-off awards, the government could look to its reserve.

“It’s got about £14bn squirrelled away in that reserve. The government might be hoping that that's there for things like extra support for Ukraine, or extra support for energy bills, were energy prices to move up again, but at least some of that perhaps could be devoted to public sector pay awards.”

The government has been arguing, during months of strikes, that it cannot afford to pay public sector staff more. But Johnson said this does not add up given Hunt “found £20bn a year yesterday for other things” such as increasing the defence budget and extra childcare support.

“This is of course, as all of this is, a question of choices and priorities,” he added.

Civil servants ‘ignored’ in budget

Civil service union Prospect, which held its first strikes yesterday over the latest pay dispute – joining PCS which has been staging walkouts for the last three months – slammed chancellor Jeremy Hunt for offering nothing to civil servants in the budget.

Mike Clancy, Prospect’s general secretary, said: “As Prospect members in the civil service undertook their biggest industrial action in over a decade, the chancellor had nothing to offer them on their pay or conditions – let alone mentioning them in his speech.

“With pay already having fallen by up to 26% since 2010, our members simply cannot afford to see their living standards fall any further."

Tens of thousands of Prospect civil servants walked out on Wednesday, along with up to 133,000 officials from PCS.

Public sector pay lagging behind

This swap in fortunes was exemplified by the gap in average pay growth between August and October 2022, when wages grew by 6.9% in the private sector by just 2.7% in the public sector. This was one of the largest differences ever seen, according to the Office for National Statistics. 

The gap was less, however, in the following three months, with a 7% average increase in private-sector earnings between November and January, compared to 4.8% in the public sector.

In real terms, workers are less well off on average across the board, as the increases are well below inflation, which has been above 9% last April and is currently at 10.1%.

In evidence given to pay review bodies, published last month, departments said 3.5% was the most they could afford to offer to workers including doctors, nurses, teachers and police officers. 

Emmerson said this would lag behind what the Office for Budget Responsibility and the Bank of England think is going to happen to the private sector. The two bodies have predicted pay rises of 4.5% and 5.5% respectively. 

There is no pay review body for most civil servants, whose pay is determined by guidance issued by the Cabinet Office and Treasury.

Senior civil servants do have a pay review body but the government has not yet published its evidence for their pay awards.

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