Chancellor hints at above-inflation pay rise for public sector workers

An above-inflation pay rise may be on the horizon for public sector workers as Chancellor Rachel Reeves suggests a decision will soon be made.

Independent pay review bodies have recommended a 5.5% pay rise for teachers and roughly 1.3million NHS workers, reports in The Times suggest. Inflation stands around 2%.

‘But we’ll do it in a proper way’, Reeves told the BBC’s Laura Kuenssberg. ‘Make sure that the sums add up.’

The increase could help satisfy unions that have been rallying against more than a decade of stagnant wages, which have partly fuelled recruitment and retention crises across the public sector.

Such a rise could cost an extra £3billion for schools and the NHS alone though, the Institute for Fiscal Studies (IFS) predicts.

Applied to all public sector workers, a 5.5% pay rise could cost taxpayers roughly £10billion, according to IFS estimates.

‘But we also know that there is a cost to not settling’, Reeves said. ‘A cost of further industrial action, a cost in terms of the challenge that we face in recruiting retaining doctors and nurses and teachers as well.’

Strikes by healthcare workers cost the NHS roughly £1.5billion in the 12 months leading up to January this year, NHS England revealed.

More than 1.3million NHS appointments were cancelled as a result of industrial action between February 2022 and January 2024, the health service said.

At the heart of the disputes is years of stagnant wages that unions say makes it harder to recruit staff to fill the roughly 100,00 vacancies across the NHS in England.

Schools face a similar problem, with staff shortages piling on the workload of teachers who report increased levels of burnout as a result.

Doctors, nurses and teachers saw the real terms value of their pay fall by as much as 10% between 2010 and 2019, according to the IFS.

A soaring cost of living since then has eaten away at their pay even further.

From the end of 2019 to November 2023, public sector pay fell by 0.3% when adjusted for inflation, while private sector workers saw theirs grow by 2.3%.

But there is concern about the capacity of schools and the NHS to pay for a 5.5% pay rise out of existing budgets.

Paul Johnson, director of the IFS think tank, said: ‘In terms of the cost, there isn’t a specific number that is budgeted for schools, it’s probably 1 or 2%, it’s certainly nothing like 5.5%, so we’d certainly be looking at at least an additional £1 billion on schools’ costs relative to what they’re currently expecting.

‘And a number at least double that across the NHS if the proposals for the NHS are similar, which it appears that they might be.’

Keen to project an image of financial responsibility just over two weeks into her role as Labour’s Chancellor, Reeves stressed her spending rules as ‘non-negotiable’.

She said: ‘We will do it in a proper way and make sure the sums add up.’

Reeves blamed former Conservative ministers of ‘running away’ from making a decision before now, a sentiment echoed by trade unions who felt ignored during much of the industrial disputes.

She claimed former Education Secretary Gillian Keegan had left pay review reccomondations sitting on her desk for months without a response.

But Reeves’ own ministers are staying tight lipped on whether plans for a 5.5% pay rise are indeed in motion, although Reeves said ‘people won’t have long to wait for a decision’.

Treasury minister James Murray said the Chancellor will present the government’s response to pay recommendations at the end of this month once the state of public finances are taken into account.

He said it would not be ‘helpful’ for him to ‘pre-empt the process that we are going through now’.

As with many spending decisions the new Labour government currently faces, Reeves is blaming a tendency for counting pennies on the previous Conservative administration.

This has caused division within Labour right from the start of its term as it hides behind ‘affordability’ to avoid scrapping the two-child benefit cap, which many see as a quick fix for lifting half a million children out of poverty.

During Reeves’ appearance of Sunday With Laura Kuenssberg today, the BBC journalist claimed ‘there is nothing that [Labour] are doing that will immediately put money into the pockets of working people’.

In her first speech as Chancellor, Reeves described the situation they’ve taken over from the Conservatives as the worst fiscal inheritance since the Second World War.

Former chancellor Jeremy Hunt disagrees, telling Sunday With Laura Kuenssberg this was ‘absolute nonsense’ designed to lay the groundwork for tax rises.

He said: ‘I was looking until a couple of weeks ago at the same numbers that Rachel Reeves is now looking at.

‘It’s very clear that if you are prepared to show restraint on public sector pay, as we did last year, if you’re prepared to be ambitious on public sector productivity, as I was in the budget, and you’re prepared to do welfare reform, which was glaringly absent from the King’s Speech – if you do those three things it’s perfectly possible to balance the books in a way that means taxes don’t have to rise.

‘Now I think it’s very clear from what we’ve seen in the first two weeks of this Labour Government that they’re not prepared to take those difficult decisions.’

Mr Hunt also denied the Conservatives had ‘run away’ from making decisions on public sector pay.

He said: ‘You can criticise me for many things, but not taking tough and difficult decisions is one thing I don’t think people would level at me.’

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