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UK explores 5% pay rises for public sector workers

Government insiders say pay arrangements for UK public sector staff could rise to 5 per cent this year as ministers try to avert widespread strikes by key workers.

Amid the escalating cost of living crisis, ministers see it increasingly unsustainable to maintain pay agreements in the public sector — particularly for nurses and teachers — in the 2 to 3 percent range they target.

However, the Treasury refuses to fund more generous wage deals, meaning Whitehall’s departments would have to find the money for 5 percent settlements within existing budgets.

A government official said the independent pay review bodies — which make recommendations to ministers on the pay of teachers and health workers, police and prison staff, civil servants and the armed forces — were expected to recommend pay increases of typically “one or two percentage points” above the target in the coming weeks. limit of 3 percent, implying an award of 5 percent in at least some cases.

If ministers accept the recommendations, “unless things change, those increases should still come from efficiencies rather than the Treasury handing over more money,” the aide added.

Prime Minister Boris Johnson and Chancellor Rishi Sunak have argued that large public sector wage increases would be both unaffordable and inflationary, given the Bank of England’s fears of a so-called wage-price spiral.

But one minister said: “If we don’t aim for 5 percent on some of these, [pay] deals, we risk wave after wave of strikes.”

The minister added that Downing Street was particularly concerned about pay increases for nurses and teachers “which are likely to cause the most headaches”.

Line chart of real average weekly earnings in UK (total wages, including bonuses, 2010=100) showing public sector wages remaining well below 2010 levels in real terms

The Treasury said any public sector wage increase “must be proportionate and balanced with the need to manage inflationary pressures and public sector finances”.

With inflation at 9.1 percent at a 40-year high, opinion polls suggest public anger is mounting over the government’s suggestion that key workers should receive a major pay cut.

“Inflation is not caused by nurses and health care providers wanting enough wages to keep food on the table,” said Frances O’Grady, general secretary of the Trades Union Congress.

Most UK workers will face wage cuts in real terms this year, with the BoE forecasting inflation to hit 11 percent by October.

However, public sector workers have already taken a major hit: their wages in real terms are already about 4.3 percent lower on average than in 2010.

The latest official data shows that staff wages have risen nominally by just 1.5 percent in the past year, while total private sector wage growth has increased by an average of 8 percent.

Column chart of nominal monthly wage growth, by position in the UK income distribution, expressed in % Top earners have seen the strongest wage growth in the past two years

Against this backdrop, the biggest rail strikes in a generation in the UK started on Tuesday, when 40,000 members of the RMT union walked out over pay, work practices and layoffs. Many are employed by the state-owned Network Rail, the infrastructure manager.

Now unions of teachers, trainee doctors and civil servants are preparing to vote members on possible union action if their wage demands are not met.

But despite the risk of widespread union action, Sunak is resisting pressure from Whitehall departments to reopen its spending statement from last year to fund better wage deals.

The chancellor last month unveiled £15 billion in targeted aid to help households with rising living costs, which the Institute for Fiscal Studies think tank calculates will almost completely offset the impact on the poorest families.

But with this support, the Treasury is digging in against further demands.

While higher inflation is likely to bolster the government’s tax revenues, Sunak’s allies said there would be no additional funding for Whitehall’s divisions to help them manage wage pressures.

British Chancellor Rishi Sunak, pictured in May

Allies of British Chancellor Rishi Sunak said there would be no additional funding for Whitehall’s wards to help them manage wage pressures © Reuters

They added that departments had “flexibility” in responding to the wage review agencies’ recommendations, and that they had to make choices about what to cut if they wanted to pay employees more.

In practice, this will force departments to make major compromises in the delivery of public services.

The Department of Health and Social Care told the NHS wage rating agency it could afford a top prize of up to 3 percent.

Each 1 percentage point pay increase for hospital and health services staff would cost £900 million – equivalent to the salaries of 16,000 full-time nurses – and would therefore make it more difficult to tackle treatment backlogs in elective care.

The Ministry of Education said any 1 percentage point pay increase for the schools’ staff would cut £350m in other spending over the next two years, meaning headteachers would find it harder to hire new staff or help children recover from Covid-19’s lost learning points to catch up with lockdowns.

A government official said the Treasury was “in denial” about the level of public sector wage schemes being reasonable.

The official also compared the situation of key workers to retirees, who should see basic pension increases by about 10 percent in April as the increase is linked to inflation.

Sunak has made it clear that cutting inflation is not his only motive for opposing more generous wage schemes in the public sector.

At a cabinet meeting on Tuesday, he stressed the government’s responsibility to avoid any action that would “increase inflationary pressures or reduce the government’s ability to cut taxes in the future,” a spokesman said.

Sunak is committed to cutting income taxes by 2024, although Conservative MPs are calling for faster measures to help cut the cost of living.

Meanwhile, economists disputed the idea that intense pressure on public sector wages was needed to contain inflation.

“The Bank of England can handle inflation,” said Tony Yates, an associate of the Resolution Foundation, another think tank. “Wage policies must be aligned with labor market conditions, i.e. with regard to recruitment, retention and motivation.”

Simon Wren-Lewis, a professor at Oxford University, argued: in a blog that because public sector wage increases did not directly feed consumer prices, “in that very simple sense you just can’t get a public sector wage-price spiral”.

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