According to the IFS, a clouded outlook for the economy is the only significant reason the Treasury could use to justify maintaining its stance on public sector pay increases.
In an analysis published before the 15 March budget, the IFS stated that it anticipated the government to borrow approximately £30 billion less this year than it had anticipated in November.
While approximately £6 billion of this is likely to be spent on another suspension of fuel duty. This would still result in borrowing that is nearly £25 billion less than anticipated.
It was estimated that a CPI-matching 5.5% increase in pay across the public sector would cost approximately £5bn. Which was a relatively modest amount in comparison to the recent underspending.
The government had argued that higher pay would cause inflation, but “this is not a strong case.”
“Most evidently, the impact of injecting £5 billion into an economy with an annual GDP well over £2,000 billion would be modest,” the IFS stated.
According to the IFS, while economists had previously anticipated a severe recession in 2023, their expectations have since shifted, in large part because wholesale energy costs have decreased more than anticipated.
However, it cautioned that this short-term improvement masked a more fundamental issue. The UK’s long-term growth potential remained disappointingly weak, prompting concerns about its ability to generate taxes in the future.
Isabel Stockton, the principal research economist at the IFS, stated, “It is difficult to see a resolution to public sector pay disputes and industrial action without the Treasury providing additional funding to departments.”
“Short-term improvements in the outlook for borrowing could permit one-time incentives or retroactive pay for public sector employees.
“But it’s not obvious that these gains will last, and if the Bank of England is correct. The UK’s medium-term growth outlook may have worsened.”
She added, “Short-term savings cannot finance permanently higher expenditure. Which a higher consolidated pay increase for public sector employees would entail.”
“The chancellor likely has less financial flexibility than recent headlines imply.”
