Public sector pay has fallen by 2.5% in real terms since 2010, while private sector pay rose by just under 4% in the same period. Nurses’ pay fell by 6.5%; teachers’ by even more at 9%. These are the facts that underpin the chancellor Rachel Reeves’s decision that public sector workers will get an above-inflation pay rise this year, in line with the 5.5% recommended by the independent pay review bodies.
These increases are needed not just as a matter of fairness for teachers, nurses and doctors but because falling real rates of public sector pay are compounding the recruitment and retention issues facing hospitals, schools and other public services. That has not stopped the Conservative opposition launching the familiar claim that the government is in the pockets of its trade union paymasters. On Friday, Kevin Hollinrake, the shadow business secretary, said: “The unions are now back in charge and the country will pay the price.”
That is disingenuous in the extreme. The last Conservative government sought to make fiscal savings by suppressing public sector pay. While it may have reduced the size of the overall pay bill – and some of the lowest-paid workers, such as teaching assistants, were relatively protected – the strategy lowered morale and created a staffing crisis across the public sector. In the NHS, there are more than 121,000 vacancies, with the most deprived areas worst affected. The National Foundation for Educational Research has said that “teacher supply is in a critical state that risks the quality of education that children and young people receive”; last year, teacher recruitment targets were missed in 10 subjects. Recruitment issues mean that hospitals and schools have to rely more heavily on extortionately expensive agency workers in the short term. Labour has made recruiting more NHS workers and teachers a centrepiece of its public sector reform plans; it cannot achieve this without pay rises, recommended by independent panels based on the evidence, including on living standards and recruitment and retention.
So Reeves was entirely right to indicate that she will accept the recommendations of the public sector pay review bodies. But where is the £9.4bn a year that will cost to come from? Reeves has adopted the arbitrary and over-conservative fiscal rule of her predecessor, Jeremy Hunt, that debt must be forecast to be falling as a share of GDP in five years; she has also limited herself to borrowing only to fund investment, not day-to-day running costs. Schools and hospitals do not have enough room in their already stretched budgets to fund these increases from their existing allocations: it will require extra money that, in light of these rules, will have to come either from cuts elsewhere or from tax increases.
This speaks to perhaps the single biggest existential issue facing the government. Its economic inheritance was unenviable: sluggish productivity growth, decades of poor levels of business investment, all made worse by Brexit. Record numbers of working-age people are economically inactive. Meanwhile, everywhere you look there are demands on public spending: from a chronically underfunded NHS, to the services for vulnerable adults and children that suffered 14 years of spending cuts, to rising child poverty driven by reductions in financial support for low-income parents; the poorest 10% of families with children lost a staggering £6,000 a year on average between 2010 and 2024 as a result of changes to the tax and benefit system. To make things worse, Labour has accepted the Conservative baseline for public spending, which bakes in another round of unfeasible spending cuts.
This is by far the chancellor’s biggest headache. Her answer is that Labour will grow the country out of these problems, driving increases in living standards but also raising tax revenues that can be used to repair the public infrastructure and services that have been so badly damaged by successive Conservative chancellors.
The problem is that Labour’s plan for growth is missing substance. It is heavily reliant on ambitious targets for housebuilding that Reeves hopes will be delivered primarily through planning reforms, and on the belief that modest public investment in an area such as the green transition can leverage in enough private investment to provide the boost the economy needs. Labour could get lucky, but the risk is that this is nowhere near enough to deliver growth on the scale needed. Labour significantly scaled back its public investment plans before the last election; reports suggest that Reeves may further cut back on planned investment projects for which the last government did not set aside funding. And growth will be hard to deliver without investing in the health and employment services needed to reduce rates of worklessness.
The truth is that fiscal conservatism proved a good electoral strategy for Labour, but it falls badly short as a governing philosophy. There are things the government must do immediately, as a moral imperative, such as improving financial support to children living in poverty. And other areas of spending are necessary to achieve growth. Public sector pay is just the start of it. Reeves can find extra resources from taxation, for example through reforming capital gains and inheritance taxes to ensure that the wealthiest make a fairer contribution. But she also needs to adopt a more flexible approach to borrowing to fund the public infrastructure without which healthy growth is likely to remain a pipe dream.
