Spending dilemma as Reeves hints at above-inflation public sector pay rise

Labour is fast approaching a moment of truth over its election pledges on tax and spending, experts say, after Rachel Reeves indicated the government could agree above-inflation pay rises for public sector staff.

- Peter Walker

The chancellor promised a full statement on pay board recommendations that teachers and NHS workers should receive 5.5% pay awards, before an autumn budget that is set to be one of the most difficult economic balancing acts in years.

While Reeves said denying such pay rises would bring its own costs, notably in likely strike action and a hit to recruitment and retention, economists said agreeing them would cost billions of pounds not on the balance sheet. Government spending plans, following an election in which Reeves and Keir Starmer repeatedly ruled out rises to many taxes, "aren't consistent with pay rises in the region of 5.5% to 6%", said Ben Zaranko, senior research economist at the Institute for Fiscal Studies (IFS).

"It's extremely difficult to see how you do that without finding some extra cash from somewhere, probably some combination of higher taxes or higher borrowing. It may be that they can fudge the fiscal rule or they get a bit lucky with the economic outlook. But I've got limited sympathy for the argument that things are economically much worse than we thought. It was all entirely predictable and predicted."