Rachel Reeves has been warned public sector unions will demand higher pay increases to compensate for accelerating inflation, heaping pressure on the chancellor to find billions of pounds in extra funding.
The government made recommendations in December for a 2.8% pay rise for teachers, NHS staff and other public sector workers for the financial year beginning in April, saying it was a “reasonable amount” given forecasts for the economy.
However, inflation is expected to rise by more than anticipated amid a renewed squeeze on the cost of living for households. Figures this week are expected to show inflation climbed to 2.8% in January from 2.5% in December, and the Bank of England says inflation will keep rising towards 3.7% this year.
Unions are awaiting reports from the various independent pay review bodies for the public sector, which could accept the government’s suggested increase, or recommend higher settlements.
Paul Nowak, the general secretary of the TUC, said: “Our unions will be arguing that it needs to be more. But crucially, it needs to be more, not just this year, but there needs to be that route map for the future.”
The head of the trade union movement in England and Wales said rising inflation meant workers were facing deeper real-terms pay cuts. “I think our unions will be making that point very clearly,” he said.
Rachel Harrison, GMB national secretary, said the proposed 2.8% increase was “already pushing it” after years of austerity. “If inflation rises more than expected it simply won’t be enough.”
Labour made settling public sector pay disputes one of its first priorities in government, to end rolling strikes that had crippled the economy under the Conservatives. Reeves agreed above-inflation increases averaging 5.5% for public sector workers last year.
But the National Education Union (NEU), which represents teachers, is carrying out an indicative ballot of its members from 1 March to ask if they would support potential industrial action over pay.
Daniel Kebede, the NEU’s general secretary, said a 2.8% pay rise was inadequate. “It will be another real-terms pay cut, compounding the damage caused by years of pay cuts under the Conservatives.”
At the time of the government’s pay recommendation in December, the Office for Budget Responsibility (OBR) was forecasting inflation would average about 2.6% in the coming financial year.
However, the Treasury watchdog is expected to increase its prediction for inflation when it next publishes forecasts on 26 March alongside the chancellor’s spring statement.
It is also widely expected to downgrade its growth forecasts, which could set the chancellor on course to bust her self-imposed fiscal rules. The Treasury has made clear Reeves would make cuts to her spending plans rather than allow that to happen.
Reports from the pay review bodies are expected to start arriving on ministers’ desks in April, before Reeves’s 11 June spending review.
Nowak said higher pay was needed to help the government meet its pledge to fix broken services. “Holding down the pay of public sector workers isn’t going to help resolve the fact that we have got 160,000 staff vacancies in the NHS, a recruitment and retention crisis in our classrooms, prisons that are desperately overcrowded.”
Sharon Graham, the general secretary of Unite, said ministers “hiding behind discredited pay review bodies” to suppress pay would only make problems with staff recruitment and retention worse. “The government urgently needs to invest in the public sector workforce,” she said.
The latest official figures show annual growth in average earnings across the economy was 5.6% in the three months to November. But while Threadneedle Street predicts this will slow, it still expects average annual pay growth to average about 3.7% this year.
Every 0.5% increase above 2.8% costs the NHS in England about £700m, meaning an increase matching the inflation peak forecast by the Bank would cost the government almost £1.4bn more than it is budgeting for.
Labour has sought to prioritise driving efficiency gains as part of the spending review, with Reeves promising to apply a “relentless commitment to rooting out waste”.
A government spokesperson said: “it is vital that pay awards are fair for both workers and the taxpayer, so that we can deliver mission-led, high-quality services across the country.
“The independent pay review body process is in place to ensure that pay awards are fair to our critical public sector staff, and to British taxpayers. We will consider their recommendations carefully.”
