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The Progressive Policy Think Tank

Nearly half the cost of lifting NHS pay cap would come back to government

IPPR’s new analysis shows that increasing NHS pay in line with inflation could generate additional £250m GDP by 2020, but the Chancellor must use his Autumn Budget to fund the pay rise

The actual cost to the Treasury of lifting the NHS pay cap would be less than £1 billion by 2019/20, according to a new report published today by IPPR, the progressive policy think tank.

Ahead of the Autumn Budget, the IPPR analysis shows the headline cost of increasing pay in line with CPI inflation would be £1.8 billion a year by 2019/20, compared with keeping the cap in place. However, the new IPPR analysis shows that the real cost to the Treasury would be just half that - £950 million – when taking into account the fiscal impact of money immediately returned to the Treasury through higher tax receipts and lower welfare payments, and the impact of additional GDP generated.

The new IPPR analysis shows that a ‘catch-up’ scenario – of increasing NHS pay in line with private sector earnings plus 1% – would have a headline cost of £3.9 billion by 2019/20, but a net cost to the Treasury of £2.1 billion. Under this catch-up scenario, nearly a third of the real terms cut to a nurse’s pay since 2010/11 would have been reversed by 2019/20.

Workers in the NHS have experienced a seven-year pay squeeze. This has significantly eroded the value of pay in the NHS; pay for a band 5 nurse is £3,214 lower in real terms today than in 2010/11. The decline in real terms pay has led to a 10% fall in satisfaction with pay and contributed to an escalating workforce crisis. The NHS is facing growing challenges with recruitment and retention, with the number of nursing vacancies doubling in three years, and the number of NHS nurses in England falling for the first time in four years.

The IPPR report shows that lifting the pay cap would both boost growth and rebalance the economy. Increasing NHS pay in line with CPI would generate additional GDP of £250 million by 2019/20, with associated additional tax income of £100 million. Increasing NHS pay would help narrow regional inequalities, by boosting pay most in regions outside London and the South East where pay is lower. The impact in cash terms is nearly twice as high in Yorkshire and the Humber as in the South East.

The report outlines that any increase in pay must be funded and recommends that the Chancellor sets out how the additional funding will be raised at the Autumn Budget next month. NHS Trusts in England are on course for an underlying deficit of £5.9 billion this year. Requiring NHS Trusts to fund an increase from existing budgets would escalate the financial crisis in the NHS and it would come at the expense of patient care.

IPPR recommends that:

  • The government should lift the NHS pay cap and revise its guidance to the NHS Pay Review Body, making it clear that it will accept their recommendations for pay, including a significant real terms increase for NHS staff.
  • Government should provide additional funding at the Autumn Budget to cover this additional expenditure, rather than requiring NHS trusts to meet the cost from over-stretched budgets.
  • In the light of the potential impact of Brexit, government should develop a national NHS Workforce Strategy, in conjunction with NHS Employers and the NHS trade unions to ensure sustainable workforce pipeline for the future.

Alfie Stirling, IPPR Senior Economic Analyst, said:

“Although the headline cost of lifting the NHS pay cap is significant, a large portion is recycled back to the Treasury almost immediately.

“If the costs of lifting the cap are funded through higher taxes on the richest in society, the overall effect could also be to increase jobs and economic growth. This is because medium income families – such as the majority of those with someone working in the NHS – are more likely to increase spending in the economy, compared with the highest income families who are more likely to save.”

Joe Dromey, IPPR Senior Research Fellow:

“The seven year pay squeeze has not just hit NHS staff hard, it has contributed to a growing workforce crisis. The government can afford to lift the cap - in fact, they can't afford not to.

“But any additional increase must be funded. NHS Trusts are already running huge deficits; requiring them to find the additional funding from existing budgets risks compromising the quality of care, and the sustainability of the service

“The Chancellor must use his Autumn Budget to provide the additional funding that the NHS needs to give the workforce the pay rise they deserve.”

Contact

Sofie Jenkinson, 07981023031, s.jenkinson@ippr.org

Notes

The new IPPR report Lifting the Cap – The economic and fiscal impact of lifting the NHS pay cap will be available at https://www.ippr.org/research/publications/lifting-the-cap from 00.01 Monday 30th October. Advanced embargoed copies are available from the press office.

This report uses the Consumer Prices Index (CPI) for inflation from the ONS, and forecasts for CPI from the OBR, to measure all ‘real terms’ effects across time. Other inflation metrics are available, such as CPIH – which includes housing costs – and RPI which uses a different methodology to calculate the average rate of price change across consumer items. While the direction of trend in real pay is similar for all metrics of inflation for the period in question, our findings will not be exactly the same as those estimated using alternative inflation indices.

IPPR aims to influence policy in the present and reinvent progressive politics in the future, and is dedicated to the better country that Britain can be through progressive policy and politics. With nearly 60 staff across four offices throughout the UK, IPPR is Britain’s only national think tank with a truly national presence. Our independent research covers the economy, work, skills, transport, democracy, the environment, education, energy, migration and healthcare among many other areas.

www.ippr.org