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An initial response to the public sector pay announcement

Observation

The government has announced pay rises for public sector workers covered by independent pay review bodies. This includes the police, teachers and the NHS.

Ben Zaranko, a Senior Research Economist at IFS, said:

“Unexpectedly high inflation left the government with an uncomfortable choice on public sector pay: either to impose real-terms pay cuts on public sector workers, to cut back on public service provision, or top up its spending plans – or some combination.  

The government has definitely opted for the first of these options. Yesterday’s announcements confirmed that the vast majority of public sector workers will receive a real-terms pay cut this year. The precise awards vary from sector to sector, but the general story is one of average pay awards in the region of 5 per cent, with bigger pay rises for low earners. Within the NHS, for example, senior doctors will receive a 4.5 per cent pay rise, while cleaners and porters will receive a pay rise of more than 9 per cent. This policy of prioritising low-earners continues the precedent set in 2011−12, 2012−13 and 2021−22 and will further compress the public sector pay distribution.

These pay awards are below inflation, but above what was budgeted for when the government laid out cash spending plans last autumn. What remains to be seen is whether the government will top up its spending plans to fund these higher-than-expected pay awards, or to require the costs to be met from within existing budgets and allow service quality to deteriorate as a result.

The current Chancellor has indicated that he won’t make any major fiscal decisions before the new prime minister takes office. Re-opening the government’s multi-year spending review settlements would be a major fiscal decision, and so is likely to be left until the autumn budget.

The new occupants of Numbers 10 and 11 Downing Street will therefore face a hugely important fiscal choice.

One option is to top up spending plans to at least partially fund the costs of higher-than-expected pay awards, shoring up departments’ ability to deliver on the government’s public service objectives (such as clearing the NHS backlog). This would come at the cost of higher borrowing and reduced fiscal room for the tax cuts seemingly desired by the entire field of would-be prime ministers.

The other option is to stick to existing spending plans, instead requiring public services to make some painful cuts: to other budgets, to headcount, or to the range and quality of service provision. Reducing the government’s public services ‘offer’ is a coherent response to a series of global economic shocks that make us poorer as a nation. But the government should be honest about what that implies for the NHS, local government, and other public services.”

You can follow Ben here for charts, commentary and analysis on Twitter

 

Luke Sibieta, IFS Research Fellow, said:

“The government has upped its pay offer to teachers, with an average rise of about 5-6% in 2022. However, this is still below inflation and will make it harder to recruit and retain teachers. From schools’ perspectives, the rises are just about affordable within the existing funding settlement, but will leave very little extra money for wider goals, such as levelling-up or helping pupils catch up after the pandemic.”

You can follow Luke here for charts, commentary and analysis on Twitter

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