Rachel Reeves has indicated that the government is considering inflation-busting pay rises for millions of civil servants, despite warnings from the Treasury that such a move could result in an £8 billion budget deficit ahead of its first budget this autumn.
Two pay review bodies advising the government have recommended a 5.5% pay rise for 460,000 teachers and 1.4 million NHS staff under the ‘agenda for change’. These recommendations were reportedly submitted to the previous government before the election, but Conservative ministers delayed action until after election day.
Britain employs eight independent pay review bodies covering around half of all civil servants, including the police, prisons, military and civil servants. Although their recommendations are advisory, they are often implemented. Sources suggest that recommendations for other sectors are likely to be similar to those for teachers and NHS staff.
Under former Chancellor Jeremy Hunt, the Treasury Department ran private modeling to estimate the cost of implementing these pay recommendations above inflation. The modeling assumed a 6% increase for the change workforce agenda and a 5% increase for other public sector workers. If the Chancellor agrees to these increases, Treasury calculations point to an additional cost to the Treasury of £8 billion.
Reeves hinted at the possibility of following through on the recommendations during an interview on BBC’s Sunday with Laura Kuenssberg, while ensuring fiscal responsibility. “There are costs associated with not settling, the costs of further industrial action, and costs in terms of the challenge we face in recruiting,” she stated.
She criticized the previous Conservative government for delaying tough decisions on pay, singling out former Education Minister Gillian Keegan for ignoring teacher pay recommendations. Former Chancellor Jeremy Hunt rejected these claims, arguing that balanced budgets could be achieved without tax increases if Labor reformed the welfare system and controlled public sector wages.
The Resolution Foundation recently warned that the new government faces a potential budget gap of £12 billion. If Labor decides to protect areas such as prisons, police and local authorities from further cuts, the deficit could rise to £33 billion. Public sector wage increases could worsen this problem, forcing Reeves to consider spending cuts or tax increases.
Alternatively, the government could offer lower wage increases, risking a confrontation with unions and possible strikes. Ministers are currently negotiating with trainee doctors and railway unions to resolve ongoing disputes.
Bridget Phillipson, the Education Secretary, recently told teachers that the government could not immediately implement the pay recommendation, despite pressure from unions to take action. School leaders have also indicated the need for additional funding to meet these wage recommendations. A survey by the National Governance Association shows that 60% of schools and trusts cannot balance their budgets.
Education unions have voted in favor of strike action over wages, arguing that real wages have fallen since 2010. The National Education Union (NEU) has postponed formal strike action pending the September pay offer. NEU Secretary General Daniel Kebede stressed the need for substantial pay increases to address recruitment and retention challenges in education.
Nurses continue to dispute pay with the government after a 5% pay increase was imposed last year. Concerns within Labor highlight that nurses received a lower percentage of increases compared to consultants and trainee doctors, who continued strike action.
A government spokesperson said: “We value the vital contribution that almost six million public sector workers make to our country. The pay review process is ongoing and no final decisions have been made yet. We are under no illusions about the size of the fiscal legacy we face.”
During her BBC interview, Reeves also rejected calls to reconsider the benefit limit for two children, citing the annual cost of more than £3 billion.