Labour faces £7bn bill to fund public sector pay deals if it wins election

A new Labour government would need to find at least an extra £6bn to £7bn to fund pay deals due immediately after the election if it wanted to prevent nurses, teachers and other public sector workers falling further behind their counterparts in the private sector.

The estimate, from the Institute for Fiscal Studies, underlines the challenge facing ministers who must tackle a workforce crisis in schools, hospitals and other services. It suggests that if Labour wins the general election on July 4 it will face an early test of its relations with unions that want public sector pay to regain its pre-austerity value.

“I really don’t want to be balloting for strike action . . . but the new government needs to recognise the scale of the crisis,” said Daniel Kebede, general secretary of the National Education Union, who wants to see an early pledge to restore teachers’ pay to its real-terms 2010 level.

Over the past year, average wages have grown at a similar pace of about 6 per cent in both the public and private sector, reflecting deals struck to end a wave of strikes in the NHS, schools and scores of government agencies.

But this is not enough to make up the ground lost over 15 years in which wages lagged both inflation and private sector pay. And awards for 2024-25 — already overdue — are likely to be much less generous.

Wes Streeting, the shadow health secretary, has made it clear “the money simply is not there” to meet junior doctors’ demands for a 35 per cent pay rise, although a Labour government would see it as a priority to thrash out a resolution of their long-running dispute.

Recommendations on pay for other NHS staff, teachers, police, prison guards, senior civil servants and the armed forces will also be waiting at the top of new ministers’ inboxes.

Pay review bodies covering these areas give annual advice on how far salaries need to rise to support recruitment and retention.

Ministers usually adopt their recommendations, publishing both the advice and their decision in July. But they also set the PRBs’ remit — and this year, ministers told the PRBs to take into account the “historic nature” of last year’s bumper pay deals, and “tight affordability”.

Bee Boileau, research economist at the IFS, said departmental budgets had allowed for pay growth of about 3 per cent a year across the public sector when they were last set in the 2021 spending review.

If inflation remains close to 2 per cent, that could leave scope for real-terms pay increases. But the Bank of England expects private sector pay awards to average 5.5 per cent in 2024.

To match that benchmark, the government would need to spend an extra £6bn-£7bn on pay this year, Boileau said. If departments had to find the money within existing budgets, it would squeeze other priorities — including Labour’s commitments to recruit 6,500 teachers and train more midwives.

In fact, the shortfall could be bigger, as key departments have already raided other areas of their budgets to cover last year’s pay deals.

Kebede said the current funding envelope for English schools allowed for pay awards of only 1-2 per cent — which he called “highly problematic” when a failure to recruit enough subject specialists had made science teachers “an increasing rarity” in less affluent areas.

Sally Gainsbury, a senior policy analyst at the Nuffield Trust, said NHS England had budgeted for a pay rise averaging just 2 per cent across the non-medical workforce in 2024-25. Matching private sector wage growth across the entire workforce in 2024-25 would cost more than £3bn of extra funding — consuming almost all the cash increase in NHS England’s budget.

But failing to do so could sap staff morale and productivity further, when a workforce “that was at the absolute coal face of the pandemic . . . has not come out of industrial disputes feeling well served”, she said.

Unions have been warning Labour that the party’s plans to repair public services will flounder unless it goes further and commits to reversing the losses public sector workers have suffered since 2010.

This would be a much more expensive commitment: Elaine Kelly, an assistant director at the Health Foundation think-tank, said restoring NHS pay to its 2010 real-terms level would add an extra £9.3bn a year to the pay bill by the end of the parliament. 

In private, union officials are realistic about the prospect of any sudden step-change. But if ministers try to limit pay rises to the bare minimum needed to match inflation, it would be seen as “provocative”, one notes.

Unions argue the pay-setting process needs to change, scrapping the PRBs in favour of a collective bargaining process that could address not just pay, but other issues such as workload, retirement ages or job content. 

Kebede recalls the Houghton inquiry instigated by an incoming Labour government in 1974 — after a similar bout of high inflation, strikes and recruitment problems — which led to a 28 per cent uplift in teachers’ pay.

“We’re not expecting that,” he acknowledged, “but we need to see a change in the direction of travel.”