The Treasury has warned that unaffordable pay rises will fuel inflation and suggested that public sector workers could get a rise of about 3.5 per cent this year.
Rishi Sunak, the prime minister, has suggested that he wants to break the deadlock with the unions by offering them higher pay in 2022-23.
However, the Treasury’s economic evidence to pay review bodies includes a stark warning that higher pay risks fuelling inflation. This means that industrial action is likely to continue for much of the year as the government refuses to move from its broad position on pay.
The Treasury said: “It is particularly important that pay awards do not exacerbate the current inflationary pressures which are the reason behind many workers�� choosing to take industrial action.
“Higher and/or more persistent inflation would erode the real value of savings and incomes and could lead to interest rates being elevated for longer. This would have implications for the borrowing costs of households, businesses and the government, increasing mortgage costs for the former and risking burdening future generations with even higher debt.”
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Although it did not make an explicit recommendation on pay, the Treasury highlighted official forecasts suggesting that private sector earnings will grow by 3.5 per cent in 2022-23.
It said the pay review bodies should “consider 2023-24 pay awards in relation to those in the private sector” and that pay rises should be focused on areas where there were the most “acute” recruitment and retention issues.
The Treasury said that government departments would have to make significant cuts if they were to offer further pay rises, arguing that a 1 per cent increase in public sector pay awards would cost £1.6 billion.
“Recognising the broader fiscal context, pay review bodies should also note the significant pressures departments are facing on their budgets,” it said. “The original funding provided for 2023-24 pay awards has already been consumed by above-affordability pay rises in 2022-23, and significant reprioritisation has therefore been undertaken by departments to release funding for pay in 2023-24.
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“Pay rises above affordability will therefore require further trade-offs against other priorities, including funding for frontline public services, and investment in non-pay R&R [rewards and recognition] activities.
“In practice, the difficult reprioritisation decisions already made and existing significant pressures departments currently face leave little room in departmental budgets for pay awards above affordability without materially impacting the government’s ability to deliver policy outcomes and programme commitments.”
The government has invited union leaders to discuss 2023-24 pay awards on Monday.
Today, Sunak said: “We incredibly value the important work that our public sector workers do, especially our nurses, and we want to have an honest, grown up conversation about what is affordable, what is responsible for the country.
“Those invitations have gone out and I am hopeful that those meetings can happen on Monday so we can have a productive conversation and find a way through this.”
