Public sector pay freeze for 5.5m workers could save £23bn

Rishi Sunak faces dire fiscal projections at next week's spending review but has been warned against tax hikes that could damage growth

Rishi Sunak could save the Treasury £23bn over the next three years by freezing public sector pay as he hunts for ways to plug a gaping hole in the public finances.

The deficit is on track to hit a record £400bn this financial year, and the Chancellor will need to reduce the deficit without trashing Britain's economic recovery, beginning with his spending review next week.

Economists at the Centre for Policy Studies think tank propose a pay freeze for the public sector, to save money and avoid pushing through salary hikes at a time when private sector workers are bearing the brunt of job losses and wage cuts.

The 5.5m people on the public payroll are paid almost £200bn a year, so this is a significant chunk of spending.

Until the pandemic struck, pay was roughly equal between private workers and their counterparts in the public sector, the CPS said, though pensions are typically more generous for state employees.

However, wages tumbled in the private sector when the pandemic struck, and unemployment has climbed by 260,000 despite the expense of the furlough scheme.

A freeze would save £3.8bn in the first year, £7.7bn in the second and £11.6bn in the third, the conservative think tank said, relative to the cost of a 2pc rise each year, adding up to £23bn.

If healthcare workers, who make up around a third of the public sector payroll, were excluded from the freeze, the total savings would be just over £15bn instead.

By comparison, an extra penny on the basic rate of income tax would be expected to raise just over £16bn over the same period.

"The economic impact of the Covid-19 pandemic has been severe, but the pain has not been shared equally. Some businesses are folding under the strain, public finances have been decimated, while the public sector has escaped relatively unscathed," said Robert Colvile, director of the CPS.

"Healthcare workers aside, it is difficult to justify generous pay rises in the public sector when private sector wages are actually falling. At the same time, there is a need to control public spending and reduce the structural deficit which the pandemic is likely to have opened up."

Mr Sunak has said that "in the interest of fairness we must exercise restraint in future public sector pay awards".

Controlling future spending this way could help the Chancellor keep a lid on the public finances as the national debt surges past £2 trillion, without either slashing other areas of spending or hiking taxes, which economists warn would risk trashing the economy at a crucial moment.

Julian Jessop at the Institute of Economic Affairs notes that ultra-low borrowing costs mean the Government does not have to crack down on the finances instantly, and instead can wait for the economy to recover, which will itself reduce spending and boost tax revenues.

"We are still in the midst of the deepest recession in living memory with the threat of mass unemployment if things go wrong, so timing is very bad," he said, arguing it is better to wait until at least 2025 before tightening the finances. This would allow GDP to recover, boosting tax revenues automatically, and let the Government see if there had been any structural changes to the economy.

"It is not as if markets are screaming out to raise taxes - the Government can borrow at 0.3pc from the private sector and even less than that from the Bank of England. I do not see any good arguments for raising taxes right now."

The economy is already struggling under the weight of the pandemic and lockdown measures.

Consumer surveys by GfK show confidence fell again to the lowest level since May, with households increasingly worried over their financial position.

Tax hikes could worsen the situation.

"Tax is one of the economic headwinds. Everyone knows we are going to be in for a harsher tax environment, so if you are a taxpayer, you are going to be clobbered at one point or another," said Joe Stanton at GfK.

One-in-three hospitality businesses told the Office for National Statistics they have little or no confidence they will survive the winter.

At the same time just half of workers travelled to work last week, with the number working from home back up to almost one-in-three.