(Bloomberg) — The UK risks a return to strikes and a shortage of nurses and teachers if it doesn’t grant above-inflation pay rises, Chancellor of the Exchequer Rachel Reeves said, following reports of a fiscal hole as large as £10 billion ($12.9 billion) from public sector wage demands.
Independent pay review bodies that represent more than 1.8 million teachers and National Health Service workers have recommended pay increases of about 5.5%, according to the Times, while the Labour government has budgeted for raises of only 3%.
“There is a cost to not settling, a cost of further industrial action, and a cost in terms of the challenge we face recruiting, retaining doctors and nurses and teachers,” Reeves said in an interview that aired on the BBC Sunday.
The government is conducting an analysis of the recommended 5.5% pay rise and Reeves said she will make an announcement on the state of the public finances by the end of the month. “People won’t have long to wait,” she said.
The Sunday Times reported that granting the higher pay award across the public sector will lead to an £8 billion hole in the UK’s finances, citing a leaked Treasury analysis.
The Institute for Fiscal Studies previously said the higher pay increase could cost an extra £3 billion for schools and the NHS alone. Paul Johnson, director of the IFS, told the BBC that if the 5.5% rise was extended throughout the public sector, the government would need to find an extra £10 billion.
“It can only come from higher borrowing than they’re planning, higher taxes than they’re planning, or cuts in spending elsewhere,” Johnson said. “There never is a fourth option here.”
‘Doom Loop’
A higher-than-expected pay increase would challenge Reeves’ pledge to stick to UK fiscal rules and avoid tax hikes.
“We’ve got to break out of this sort of doom loop of low growth, of high taxes and deteriorating public services,” Reeves said. “We’ve got to grow the economy.”
Labour has pledged to make Britain the fastest-growing Group of Seven economy and announced Saturday a review of the pensions industry, as part of plans to channel more cash into UK startups and infrastructure projects.
Reeves said there would soon be £800 billion of pensions savings in defined-contribution policies, and channeling just 1% of it into “fast-growing British companies” would drive up wealth creation.
She said working people were “being let down by the pensions industry” due to low returns.
The chancellor and Emma Reynolds, the new pensions minister, will chair a meeting with pensions industry executives Monday to discuss the review.
(Updates with more quotations from BBC interview and context throughout.)
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