Public sector pay settlements should not be determined by the current high inflation rate and should remain broadly similar with the private sector to continue to be affordable, HM Treasury has warned.
In its submission to the pay review bodies that determine pay rates for millions of public sector workers, it says that the rapid growth in inflation seen over the past year is expected to be only temporary, and urged the bodies to “have regard of the government’s objective for price stability”, taking into account the government and Bank of England’s 2% inflation target.
Its warning came as the Bank of England’s monetary policy chief Ben Broadbent said that inflation is likely to soar “comfortably” above 5% next spring, when the energy price cap is set to rise. However, the Treasury predicted that it would peak at 4% in 2022.
In October, the retail prices index (RPI) rate of inflation was 6.0% and the consumer prices index (CPI) rate was 4.2%.
“If public sector pay increases were to exacerbate temporary inflationary pressure, for instance through spilling over into higher wage demands across the economy or contributing to higher inflation expectations, then these short-term pressures would become more sustained,” the Treasury document says.
“In turn, this would exacerbate cost of living pressures, as higher pay awards were offset by higher inflation, and would require significantly tighter monetary policy to address, which would also harm growth.”
It adds that the whole public sector renumeration package remains competitive, when taking account of pay, pensions and wider benefits including job security.
In April 2021, the median public sector salary was £3,500 higher than the private sector median, it says.
“Over the last five years public sector wage settlements have been higher than in the private sector. Wage settlement data is the most analogous to how pay awards are set in the public sector. The temporary pause to public sector pay awards in 2021/22 ensured the public sector premium did not widen further,” the document says.
The public sector pay freeze, implemented at the height of the pandemic last year, is set to end in 2022, chancellor Rishi Sunak announced in October.
Median whole economy pay settlements were 2.0% for the three months to October 2021 and 1.7% for the 12 months to October 2021.
“This is below average settlement levels in 2019, but has recovered from the drop during the pandemic. Business surveys on expected settlements in the year to August 2022 suggests a slight increase in settlements, with private sector employers anticipating awards of 2.5% in the 12 months to the end of August 2022,” the document says.