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Rishi Sunak was called out last week for saying that tackling inflation in public sector wages would cost £28bn. According to Number 10, a 10% pay rise would cost Britain’s 28 million households £1,000 a year in higher taxes.
Not according to the Institute for Fiscal Studies, which says the Treasury sums don’t add up. So how much will it cost to give a pay rise to public sector workers?
10% increase in salary
Ben Zaranko, an economist at the think tank, says that even using Sunak’s methodology, the figures are wrong. The total public sector pay bill in 2021/22 was £233bn. Using the 10.1% average figure for the Consumer Price Index forecast by the Office for Budget Responsibility, “spending will be £23.5bn”.
The government has already agreed to finance a 3% increase, so the extra cost is just £18bn, he says. It could be as little as £13bn if the government’s new concessions for teachers and other groups are factored in as “prepaid”.
Ministers should expect to recoup around 30% of the extra spending from higher income tax and VAT receipts, reducing the bill to £8.5bn.
7% salary increase
The RMT has demanded a minimum of 7%, while some healthcare unions have indicated they would accept the same amount. If all public sector workers were offered 7% instead of 10%, the total extra bill would fall from £18bn to closer to £12bn – taking away almost £9bn of extra concessions. Around £4bn more will return to the Treasury in tax receipts, leaving an extra £5bn bill.
Will the salary increase increase inflation?
Low-inflation public sector pay hikes will not raise inflation, especially if low-paid workers are the biggest beneficiaries of the deal. The public sector does not increase its charges to reflect higher employee salaries, as private-sector companies can. Additional spending power paid to public-sector workers is also likely to be spent on energy bills and food, costs determined by global markets.
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