Public Sector Pay Rises Driving Fiscal ‘Black Hole’

Business and union bodies have commented on pending cuts announced by Chancellor Rachel Reeves to plug a £20 billion gap in the public finances:

Julian Jessop, Economics Fellow at the free market Institute of Economic Affairs, said:

"Rachel Reeves’ statement on the state of the public finances was good in parts. The estimates for the size of the ‘black hole’ may be suspect, but the increased scrutiny of in-year spending is welcome. The new Chancellor also appears willing to take tough decisions to save taxpayers’ money, such as ending winter fuel payments for better-off pensioners.

"However, taking the figures at face value, the immediate savings identified will only reduce this year’s shortfall from £21.9 billion to £16.4 billion. This suggests that substantial tax rises in the Autumn Budget will still be needed to close the gap.

"Moreover, the biggest single item is the bill for above-inflation pay rises in the public sector, only partially funded by efficiency savings. The Chancellor has also decided to double down on the existing fiscal rules, which are arbitrary and hold back the economy.

"The result is likely to be further cuts in infrastructure spending and large increases in the taxes on investment, which is not a good look for a Government that says it is prioritising growth."

Commenting on the decision to offer a 5.5% pay increase for 500,000 teachers and 1.3 million teachers, and a 22% pay increase to junior doctors, Professor Len Shackleton, IEA Editorial & Research Fellow, said:

"It appears that none of these proposed deals, which together must be expected to cost taxpayers around £5 billion more than previously budgeted, involve any commitment to reform or productivity improvements. Whatever the government claims, this addition to the fiscal Black Hole is the result of their own decisions.

"These deals may temporarily buy off some of the most obvious industrial disputes. But there are plenty more in the queue for higher pay in the public and quasi-public sectors – civil servants, local authority employees, universities and hundreds of quangos.

"The government’s hope that these big payoffs will dampen down the explosion of trade union militancy since the end of lockdown is rather optimistic. The planned trade union legislation will make it easier for unions to strike; the 2016 Trade Union Act and the 2023 Minimum Service Levels Act are to be scrapped, electronic balloting is to be permitted, union recognition will be made easier, and union reps will be allowed to enter employers’ real and virtual premises to recruit.

"Unions have long memories, and will not be satisfied with a one-off settlement. They will aim to outstrip inflation permanently and will be back again and again for higher pay. Activists long to roll back the years to the pre-Thatcher era when militants ruled, and the wind is in their sails.

"Nobody in this government has any experience of union militancy. Keir Starmer, a comparatively elderly (61) member of the cabinet, was a teenager during the Winter of Discontent in 1979. Most of today’s Labour politicians think that talking nicely to the unions will resolve any problems. I fear they are likely to learn the hard way that it ain’t necessarily so."


IoD Chief Economist Anna Leach, said:

“We had a strong statement from the Chancellor today. Business leaders will welcome that commitment to stability being restated, given how important that is for business planning. The updated mandate for the Office for Budget Responsibility creates a clearer and more transparent governance structure for spending decisions, which is also welcome. We know that businesses thrive when they can plan and invest for the longer-term.

“It was clearly disappointing to see the cancellation of a number of significant infrastructure projects. Our own research shows that investment in the road network should be the main infrastructure priority for government. We note that the government has announced the launch of the National Infrastructure and Service Transformation Authority today, and look forward to hearing more detail on the remit of the authority and the 10 year infrastructure strategy.

“Several reviews have been kicked off today, including the spending review process, and we’ve now got a date for the Autumn Budget. We look forward to working with the government in the coming weeks and months to deliver the sustainable growth that is urgently needed.”

Newton-Smith, CBI Chief Executive, said:

“The Chancellor’s statement has given a sobering assessment of the pressures on the public purse. Despite the country’s economic recovery beginning to pick up steam, the central message remains clear: the Government cannot afford to take a backwards step in its central mission to deliver the long-term sustainable growth the country needs.

“The big choices and bold moves laid out in the King’s Speech are an important first step, now we need a relentless focus on delivering those priorities and breaking down critical barriers to investment.

“Part of that mission must include a continued focus on investment in capital and infrastructure, which not only helps crowd-in private finance but boosts productivity and growth over the longer term. Given the catalytic impact on business investment and confidence, the government cannot afford to take a short-term view on vital infrastructure projects.

“Business stands ready to be a key delivery partner with the government in its mission for growth. By working with business, the new government can deploy the capability and capacity of industry to deliver the connected transitions across net zero, the digital economy, and the future of work needed to put the economy on a pathway to sustainable growth.”

TUC General Secretary Paul Nowak said:

“If we want to repair and rebuild our country – and secure higher growth – we need strong public services, investment in infrastructure and a plan to make work pay.

“That’s why the Chancellor is right to respond positively to the recommendations of the pay review bodies.

“Her approach stands in stark contrast to the previous government who played political games with the pay review bodies. Unions will now want to consult their members on today’s announcement.

“I hope this is the crucial first step in dealing with the recruitment and retention crisis blighting our schools and hospitals. And it will need to be accompanied by a long-term plan for the public sector workforce.

“The Tories’ toxic economic legacy – which has been laid bare for all to see – cannot be allowed to define our future. Working people have paid the price for far too long.

“We shouldn’t shy away from having a national conversation about how we fairly tax wealth. Policies like equalising Capital Gains Tax with the taxes paid on earnings will ensure those with the broadest shoulders pay their fair share.”