Higher pay increases for public sector workers would not be inflationary, a leading thinktank has said.
In a report undermining Rishi Sunak’s central argument against larger wage settlements, the Institute for Public Policy Research (IPPR) said raising pay by 10% on average for public sector workers would not add significantly to inflation.
Last week the prime minister announced a pay rise of at least 6% for millions of teachers, nurses, doctors and police, telling them the latest offer was “final” and there would be no more negotiations, despite the threat of further strike action.
Paul Nowak, the general secretary of the Trades Union Congress, said: “It is nonsense to blame workers for stubborn inflation when pay packets have been obliterated. Real wages have been falling and have been for almost two years.”
Sunak has argued that unions pushing for more are behaving like bullies with “unrealistic” demands that would damage the government finances and risk making inflation worse.
The IPPR said a settlement of as much as a 10.5% could be used to restore public sector pay to pre-pandemic levels after inflationwas taken into account while adding at most 0.14 percentage points to inflation if funded by higher borrowing.
The effect would be smaller still, approaching zero, if the additional increase in pay was financed from taxation. A pay increase of 10.5% would cost £7.2bn beyond the offer announced by the prime minister, it said.
Highlighting a “triple crisis” in the public sector, the left-of-centre thinktank said successive years of below-inflation pay rises had hit the living standards of public sector workers, contributing to a recruitment and retention crisis that was undermining the quality of services.
There are more than 100,000 unfilled vacancies in the NHS in England, while recruitment into teacher training is 40% below Department for Education targets.
According to the IPPR, even with the 6% pay settlement, an average public sector worker would be £1,400 worse off this year compared with just before the pandemic because wages have not kept pace with rising prices.
Separate research from the TUC shows that the only sector of the economy where pay levels have managed to outstrip inflation since the 2008 financial crisis is the finance and business services sector.
Annual growth in public sector pay has accelerated in recent months to 5.8%, the fastest rate since 2001. It still lagged behind the private sector by the largest amount on record last year and was significantly lower than in the rest of the economy. The latest official figures showed private sector wage growth at 7.7%.
Inflation has remained stubbornly high at 8.7%, driven by higher energy costs and food prices rising at among the fastest rates since the late 1970s. Economists have said shortages in the UK labour market, exacerbated by Brexit and record levels of long-term ill health limiting participation in the workforce, have added to inflationary pressure.
However, analysis by the TUC shows average earnings in seven out of eight sectors of the economy have failed to keep pace with inflation since 2008. The public sector and construction industry were hardest hit, with a real-terms decline of more than 8%. Finance and business services was the only sector to have a real-terms gain, with a jump of more than 6% since 2008.
Nowak said: “Ministers should be setting their sights on the City and clamping down on corporate excess. But the Conservatives have lifted the cap on bankers’ bonuses and seem more interested in rewarding wealth than work.”
Joseph Evans, a researcher at IPPR, said it was wrong for the government to claim that larger pay increases in the public sector would further embed inflation. “Research shows that there is very little inflationary impact from a significant pay rise, but that the need to stop the fall in living standards for public sector workers is urgent,” he said.
“Without an inflation-matching pay rise, the public sector will continue to face a triple crisis of falling living standards, a recruitment emergency and declining quality of public services.”
A government spokesperson said its pay awards were the highest for 30 years and “broadly in line with pay growth across the economy”. They said: “They are fair, responsible and sit alongside further work to improve retention in the public sector. High inflation is the most destabilising force in our economy, eating into pay cheques and slowing growth – and further borrowing to fund these pay rises would only prolong the pain.”
