More than 40 per cent of the £22bn of government overspending that Rachel Reeves blamed on the Conservatives on Monday relate to the Labour chancellor’s decisions on public sector pay, experts said.
Reeves has accused the Tories of covering up a £22bn hole in the public finances, but about £9.4bn of this is from the chancellor’s pay awards for 2024-25 of 5 to 6 per cent for staff across the public sector.
The awards are in line with recommendations from independent pay review bodies that advise ministers. Reeves said the previous government had “extraordinarily” given no indication to the bodies of what was affordable.
She was accepting the pay review bodies’ recommendations in full because last year’s strikes in schools and hospitals had “wreaked havoc” on the public finances, she said.
She added it was also “the right decision for people who work in and use public services” given increasing strains on recruitment and retention.
Paul Johnson, director of the Institute for Fiscal Studies, said this decision “is a choice and a pressure that was, broadly, understood”.
Pay awards of 5 to 6 per cent, while in line with private sector wage growth, will place acute strain on the public finances, since they are much higher than the 2 per cent annual increase factored into departments’ plans in 2021.
Also on Monday Reeves made an offer to raise junior doctors’ salaries by 22 per cent over two years in an effort to end long-running strike action.
“One challenge for the chancellor is that few of the overspends she has identified are likely to be one-off . . . An extra £9.4bn on the pay bill this year means at least that much in every year to come,” said Johnson. “Something will have to give.”
Nick Davies, programme director at the Institute for Government, said public sector pay pressures would force Reeves to make “more difficult decisions in the autumn” and “really unpalatable choices” next year.
She has funded some of the savings needed to account for the spending pressures through cutbacks to road and hospital building schemes, as well as by asking departments to find efficiency savings totalling £3bn and ending the winter fuel allowance for better-off pensioners.
The risk, Davies added, was that she would cut capital spending again in order to cover a shortfall in day to day spending — and end up compounding the UK public sector’s productivity problems.
“It’s much harder for doctors, nurses and teachers to do their jobs in crumbling buildings and on computers that take 30 minutes to upload in the morning,” he said.
The awards still fall short of unions’ demands to restore public sector pay to its real terms value in 2010, at the onset of Tory austerity policies.
Reeves’s eye-catching 22 per cent pay offer to junior doctors represented by the British Medical Association risks fuelling similar demands from other public sector unions.
“We do not begrudge doctors their pay rise . . . What we ask for is the same fair treatment from government,” Nicola Ranger, general secretary of the Royal College of Nursing.
Unite, one of the unions that led strikes by ambulance workers last year, said it was “imperative to ensure that we are not dividing NHS workers and creating even greater differentials”.
Paul Nowak, general secretary of the Trades Union Congress, made it clear that, as one of the main organisations backing Labour, the TUC would press the government to fund higher pay by raising tax.
The latest pay awards were “a crucial first step” but should be accompanied by “a long-term plan for the public sector workforce”, he said. “We shouldn’t shy away from having a national conversation about how we fairly tax wealth.”
This article was written by Delphine Strauss from The Financial Times and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.
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