·Finance Reporter, Yahoo Finance UK
Tue, 28 February 2023 at 6:00 am GMT
Chancellor Jeremy Hunt might have a bit of wiggle room in his UK spring budget but not enough to answer public pay hike demands or help UK households by cutting taxes.
It would cost the government around £5bn to match pay to inflation and a further £9bn to undo last year’s reduction in comparison with the private sector, according to the Institute for Fiscal Studies (IFS).
The think tank warned that the short-term borrowing boost would not allow for permanent spending increases, such as increasing public sector pay to match predicted inflation at 5.4% in the next financial year, or cut taxes.
The UK being on course to borrow more than £30bn less than forecast this year, according to the think tank.
The government has recommended offering millions of public sector workers below inflation pay increases. Judges, police officers, teachers, nurses, doctors and dentists in England will be offered a 3.5% pay increase under the current proposal.
The GMB union called the suggested 3.5% pay offer a “disgrace” that would do nothing to prevent further industrial action.
The Treasury says anything above 5% would risk fuelling inflation and that 3.5% is affordable. Latest figures show for inflation was 10.1% in January, down from 10.5% in December 2022.
The pay review bodies are expected to make their recommendations in April but the final decision is up to the government.
Isabel Stockton, senior research economist at the IFS, said: “It is difficult to see an end to public sector pay disputes and industrial action that does not involve the Treasury providing additional funding to departments.
“Short-term improvements in the borrowing outlook could allow for one-off bonuses or backdated pay awards for public sector workers.
“But it is far from clear that these improvements will last and, if the Bank of England is right, the UK’s medium-term growth outlook may have deteriorated.
“Short-term savings cannot finance permanently higher spending – which is what a higher consolidated pay rise for public sector workers would entail.
“The chancellor likely has less fiscal room for manoeuvre than recent headlines might suggest.”
Still, the IFS said there may be wiggle room for the government to dip into a £13bn to £14bn so-called unallocated spending reserve in the next two years to help resolve public sector pay disputes.
“One-off pay awards, or awards backdated to the start of 2023, would pose fewer fiscal challenges but would leave public sector staff permanently worse off,” the IFS said.
The think tank also estimated that extending the current level of energy support for households and businesses for another three months would cost the government around £2.7bn.
IFS director Paul Johnson said the move would be a “very straightforward thing for them to do” and comes amid mounting calls for the government to scrap plans to make support less generous for households and businesses from April.
The IFS pre-Budget report revealed that the government is on track to borrow around £31bn less than forecast by the Office for Budget Responsibility (OBR) in 2022-23 and some £25bn in 2023-34.
This is largely as a result of an £11bn saving as the energy support schemes are costing less, thanks to sharp falls in wholesale energy prices in recent months.
Chancellor Hunt will present his spring budget in two weeks’ time, on the 15th of March around noon.