Higher pay rises for public sector workers in key services would not be inflationary, finds IPPR
- New analysis shows that raising pay by 10 per cent for public sector workers would not add to inflation
Even with a 6 per cent pay rise, IPPR finds average public sector worker would still be £1,400 worse off in real terms than before pandemic
Higher pay rises are crucial to end all strikes, solve retention crisis and help millions hit by rising prices, IPPR says
Contrary to claims made by the government and others, a real-terms pay rise for public sector workers would not meaningfully increase inflation, according to new analysis by IPPR.
A 10.5 per cent pay boost to restore real pay to 2019/20 levels – higher than the rises announced by the government last week - would add at most 0.14 percentage points to inflation if funded by borrowing. This undermines objections that higher public sector pay would cause significant demand-driven inflationary pressures, the IPPR report says. The effect would be smaller still, approaching zero, if the additional pay boost was financed from taxation.
The report also reveals that if an average public sector worker were to receive a pay award around the 6 per cent announced last week they would still be £1,400 worse off this year on average than just before the pandemic, because wages have not kept up with prices. Pay for public sector workers reached its lowest point in nearly two decades last year, when adjusted for inflation.
With real-terms pay in decline since 2010, the public sector faces a triple crisis, the report says. Below-inflation pay rises have hit living standards, contributing to the recruitment and retention crisis that is undermining the quality of public services. Soaring inflation has left workers with significantly lower purchasing power.
With poor recruitment and retention of staff, the overall quality of public services is declining, leaving the UK lagging behind its international peers. There are currently more than 100,000 unfilled vacancies in the NHS, recruitment into teacher training programmes is 40 per cent below DfE targets and the number of civil servants moving department or leaving their jobs is at its highest level in at least a decade.
IPPR is calling for a 10.5 per cent average uplift this year to restore public sector pay to 2019/20 levels, at an additional cost of £7.2 billion beyond last week’s pay offers.
This should be followed by a commitment to raise public sector pay above the inflation rate every year for the next five years, the report says. As this is day-to-day spending, IPPR says it should be funded through tax increases and offers options for delivering this fairly (see Note below).
Joseph Evans, researcher at IPPR and one of the report’s authors, said:
“It’s wrong to claim that giving the public sector a more meaningful pay rise will 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.
“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.”
Carsten Jung, senior economist at IPPR and one of the report’s authors, said:
“The government’s claim that by protecting public sector pay we would hugely increase inflation is a red herring. The analysis which the government itself cites shows that restoring real pay to pre-pandemic levels would have only a marginal impact on inflation.
“Addressing the workforce crisis in the public sector requires restoring decent pay. This will require funding it through higher and fairer taxation – which the government is shying away from.”
Joseph Evans and Carsten Jung, two of the report’s authors, are available for interview
David Wastell, Director of News and Communications: 07921 403651 [email protected]
(Friday only) Liam Evans, Senior Digital and Media Officer: 07419 365334 [email protected]
NOTES TO EDITORS
The IPPR paper, The public sector needs a real pay rise, by Joseph Evans, Carsten Jung, Henry Parkes and Pranesh Narayanan will be published at 0001 on Tuesday July 18.
Advance copies of the report are available under embargo on request
Note on methodology/sourcing re the inflationary impact of public spending:
We estimate the inflation impact of public sector wage increases for a scenario in which this is paid for by borrowing in the first year, based on IMF and the BoE estimates for the inflationary impact of fiscal policy. The IMF (2023) finds that since 1985, on average, an increase of 1 per cent of government spending was associated with a 0.5 percentage point increase in inflation. Note that this is a conservative estimate. The Bank of England (2022) finds a lower impact of only 0.33 percentage points. And the Bank of International Settlements (2023) finds a lower impact still, with a value of 0.1 for countries with high monetary policy independence. Our estimated impact, drawing on the IMF, is thus an upper bound.
Note on methodology regarding costs: Fiscal costs are estimated against a baseline with a 6 per cent average public sector pay rise in 2023/24. The actual pay offer varies between public sector occupation (some getting more, some less than 6 per cent). Absent a published number, we assume 6 per cent to be the overall average. The estimated fiscal costs include pension contributions and are net of expected additional income tax and VAT. These are calculated using the IPPR Tax Benefit Model.
TABLE: Tax raising options that would dampen inflation risk while improving efficiency, equity and behaviour per
IPPR, the Institute for Public Policy Research, is an independent charity working towards a fairer, greener, and more prosperous society. We are researchers, communicators, and policy experts creating tangible progressive change, and turning bold ideas into common sense realities. Working across the UK, IPPR, IPPR North, and IPPR Scotland are deeply connected to the people of our nations and regions, and the issues our communities face.