Millions of public sector workers face a pay squeeze next year as the government seeks to fill a £35 billion gap in the public finances.
The Times has been told that the Treasury is looking at pay rises of 2 per cent across the board in the public sector for 2023-24, and that departments will be told of the “planning assumptions” tomorrow.
Such a pay rise would represent real-term cuts for nurses, teachers, police officers and soldiers. Inflation is forecast to remain at up to 9.5 per cent for much of next year.
It would also be lower than the average public sector pay rise this year, which was about 5 per cent and led to threats of industrial action.
Rishi Sunak and Jeremy Hunt, his chancellor, discussed plans yesterday to cut spending and raise taxes. They agreed it was inevitable that everyone would pay more tax.
The government is expected to extend a freeze on income tax thresholds that was due to end in 2026 to 2028, meaning millions more people will be dragged into paying the higher rate.
The Resolution Foundation, an economic think tank, warned last night that the public sector would struggle to recruit and retain staff. Torsten Bell, its chief executive, said: “Announcing public sector pay restraint at a time of much faster private sector wage growth and a tight labour market is much easier than delivering it. You can’t force people to work in the public sector and many services are already . . . struggling to recruit and retain staff.”
Sunak and Hunt are also pursuing plans to increase the windfall tax on the excess profits of oil and gas companies. Today BP is expected to announce £5 billion of profits for the third quarter of this year.
Three options are on the table: extending the existing 25 per cent windfall tax until 2027-28, increasing the rate to 30 per cent or extending it to electricity suppliers. The government could take the “full-fat” option and do all three.
The new prime minister has also refused to commit to raising benefits in line with inflation, despite senior members of his cabinet saying that he must do so to protect the most vulnerable. Other potential options include breaking the pensions triple lock, which would prevent the state pension rising in line with inflation, and freezing defence spending.
A Treasury source said: “It is going to be rough. The truth is that everybody will need to contribute more in tax if we are to maintain public services. After borrowing hundreds of billions of pounds through Covid-19 and implementing massive energy bills support, we won’t be able to fill the fiscal black hole through spending cuts alone.”
Sunak is targeting up to £50 billion in spending cuts and tax rises in expectation that the Office for Budget Responsibility, the fiscal watchdog, will warn of recession next year.
The public finances are in far worse shape than when Sunak quit as chancellor in the summer, and tax revenues in the coming years will be lower than expected because of faltering economic growth.
Although the government is in line for a “dullness dividend” of about £10 billion through lower borrowing costs after the turmoil of Liz Truss’s weeks in charge, officials say borrowing costs will remain far higher than they were.
The prime minister will base his decisions on the principle that “those with the broadest shoulders should be asked to bear the greatest burden”.
The OBR has yet to provide final forecasts but is expected to downgrade significantly its March forecast of growth of 1.8 per cent next year. The Bank of England and other forecasters are now expecting a recession and the OBR may follow suit.
While the prime minister’s official spokesman has acknowledged “pensioners are in an unusual situation: it is much harder for them to add to their income”, he said that no decisions would be made before the budget on November 17.
He also refused to guarantee that benefits would rise in line with inflation, which Sunak had promised as chancellor this year.
Hunt is pushing to delay the social care reforms introduced by Boris Johnson, including the £86,000 cap on lifetime care costs, by a year to 2024. Allies of the chancellor and prime minister argued that the move was justified because Truss had reversed the national insurance rise which had been agreed by Sunak to finance the reforms.
Sources in Michael Gove’s levelling up department have signalled that Truss’s low-tax, deregulatory investment zones are likely to be scaled back or scrapped, after warnings that they could cost the Treasury up to £12 billion in lost tax.
