Public sector squeeze looms as Sunak plugs the void

Millions of public sector workers face a brutal pay squeeze as Rishi Sunak and Jeremy Hunt plan taking the axe to public spending to balance the nation’s books.

The Treasury is thought to be considering public sector pay rises of 2 per cent across the board in 2023-24. With inflation forecast to stay around 9.5 per cent for most of next year, this amounts to a politically explosive real terms pay cut of 7.5 per cent for teachers, soldiers, police officers and nurses, not to mention civil servants. Public sector pay rises of 5 per cent this year have already led to threats of industrial action.

Yet the Chancellor and Prime Minister have agreed it is “inevitable” that everyone will have to pay more tax, as the clock ticks down to the delayed Budget on 17 November. Tory peer Lord Bridges explains Sunak’s fiscal quandary, here.

The Office for Budget Responsibility’s much anticipated economic forecast will be published alongside the Budget and chances are it will make for grim reading. In a depressing report released today, the Resolution Foundation predicts that the OBR will slash UK growth forecasts by up to 4 per cent by the end of 2024, with unemployment projected to rise to 500,000, higher than during the pandemic. 

While the OBR has a track record of pessimism, the report’s impact shouldn’t be underestimated. Growth projections feed into estimates of just how big the nation’s fiscal “black hole” (thought to be between £35bn to £50bn) really is, as they impact projections of future tax-and-spend. And the hoo-ha surrounding the omission of the OBR report from Kwasi Kwarteng’s fiscal statement will ensure the Office’s forecasts take centre stage.

Sunak and Hunt will need to be creatively brutal to find the required savings, and details are emerging on where the fiscal knife might fall.

The PM is hamstrung by his promise to honour the 2019 Tory manifesto, which would rule out raising VAT, income tax, and National Insurance contributions.

Instead, The Telegraph reports that the PM and Chancellor have agreed to freeze income tax and National Insurance thresholds until 2028, an extension of two years. The PM has also refused to commit to raising benefits in line with inflation. Hunt is thought to favour splitting the required savings 50/50 between tax hikes and spending cuts.

Might the PM choose to lean more heavily on windfall taxes? BP’s announcement today of bumper profits (£7.1bn between July and September) has reignited the debate over the windfall tax on energy firms. The tax, which Sunak introduced as Chancellor in May, is already expected to raise £17bn. Treasury sources have indicated an extension of the tax is being discussed.

Sir Charlie Bean, a former deputy governor of the Bank of England, has even urged the PM to launch a windfall tax raid on banks, which could swell the Treasury coffers by tens of billions of pounds. The reasoning is that, after a decade of rock bottom interest rates, rising rates are generating big cash flows to commercial banks due to the £900bn of government bonds bought as part of quantitative easing.

In the drive to prove fiscal responsibility, very few areas will be off-limits. The heady promises of tax cuts during the summer leadership contest already feel like ancient history.