Pay settlements for UK public sector staff could involve rises of up to 5 per cent this year, according to government insiders, as ministers try to avert widespread strikes by key workers.
Amid the escalating cost of living crisis, ministers see it as increasingly untenable to hold down public sector pay deals — notably for nurses and teachers — in the 2 to 3 per cent range they have been targeting.
However, the Treasury is refusing to fund more generous wage deals, meaning that Whitehall departments would have to find the money for 5 per cent settlements from within existing budgets.
One government aide said the independent pay review bodies — which make recommendations to ministers on pay for teachers and health workers, police and prison staff, civil servants and the armed forces — were expected in the next few weeks to recommend pay rises typically of “one or two percentage points” above the 3 per cent cap, implying awards of 5 per cent in at least some cases.
If ministers accept the recommendations, “unless things change then those rises would still have to come from efficiencies rather than the Treasury handing over more funding”, added the aide.
Prime Minister Boris Johnson and chancellor Rishi Sunak have argued that big pay rises in the public sector would be both unaffordable and inflationary, given the Bank of England’s fears of a so-called wage-price spiral setting in.
But one cabinet minister said: “If we don’t push towards 5 per cent on some of these [pay] deals, we risk wave after wave of strikes.”
The minister added Downing Street was chiefly concerned about pay rises for nurses and teachers “who are likely to cause the most headaches”.
The Treasury said that any public sector pay rises “need to be proportionate and balanced with the need to manage inflationary pressures and public sector finances”.
With inflation running at a 40-year high of 9.1 per cent, opinion polls suggest rising public anger at the suggestion by the government that key workers should suffer a big pay squeeze.
“Inflation is not being driven by nurses and care workers wanting enough pay to keep food on the table,” said Frances O’Grady, general secretary of the Trades Union Congress.
Most UK workers are facing real terms wage cuts this year, with the BoE predicting inflation will reach 11 per cent in October.
Public sector staff, however, have already taken a large hit: their wages are on average already some 4.3 per cent lower in real terms than they were in 2010.
Latest official data show staff wages have risen just 1.5 per cent in nominal terms over the past year, set against average growth in total pay of 8 per cent for the private sector.
Against this backdrop, the biggest UK rail strikes in a generation began on Tuesday when 40,000 members of the RMT trade union walked out over pay, working practices and redundancies. Many are employed by state-owned Network Rail, operator of the infrastructure.
Now unions representing teachers, junior doctors and civil servants are preparing to ballot members on possible industrial action if their demands on pay are not met.
But despite the risk of widespread industrial action, Sunak is resisting pressure from Whitehall departments to reopen his spending review of last year so as to fund better pay deals.
The chancellor last month unveiled £15bn in targeted support to help households with rising living costs, which the Institute for Fiscal Studies think-tank calculates will almost fully offset the impact on the poorest families.
But with this support in place, the Treasury is digging in against further demands.
Although higher inflation is likely to bolster the government’s tax revenues, Sunak’s allies said there would be no extra funding for Whitehall departments to help them manage wage pressures.
They added departments had “flexibility” in responding to the pay review bodies’ recommendations, and would have to make choices about what to cut if they wanted to pay workers more.
In practice, this will force departments to make big compromises in delivery of public services.
The Department of Health and Social Care told the NHS pay review body it could afford a headline pay award of up to 3 per cent.
Each 1 percentage point increase in pay for the hospital and community health services workforce would cost £900mn — equivalent to the salaries of 16,000 full-time nurses — and would therefore make it harder to tackle treatment backlogs in elective care.
The Department for Education has said each 1 percentage point increase in pay for the schools’ workforce would cut £350mn from other spending over the next two years, meaning it would be more difficult for headteachers to hire new staff or help children catch up on lost learning from Covid-19 lockdowns.
One government official said that the Treasury was “in denial” about the level of public sector pay settlements that were reasonable.
The official also contrasted the situation of key workers with retired people, who should see the basic state pension rise about 10 per cent next April because the increase is linked to inflation.
Sunak has made it clear that curbing inflation is not his only motive for resisting more generous pay settlements in the public sector.
At a cabinet meeting on Tuesday, he emphasised the government’s responsibility to avoid any action that would “feed into inflationary pressures, or reduce the government’s ability to lower taxes in the future”, said a spokesman.
Sunak is committed to cutting income tax in 2024, although Conservative MPs are calling for faster moves to help with the cost of living crunch.
Meanwhile, economists challenged the idea that an intense squeeze on public sector pay was necessary to control inflation.
“The Bank of England can deal with inflation,” said Tony Yates, an associate at the Resolution Foundation, another think-tank. “Pay policy should be set according to labour market conditions, that is with regard to recruitment, retention and motivation.”
Simon Wren-Lewis, a professor at Oxford university, argued in a blog that because public sector pay rises did not directly feed consumer prices, “in that very simple sense you just cannot get a public sector wage-price spiral”.