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Rishi Sunak has suggested that public sector pay will rise in this week’s Budget.
It would mean an end to last year’s public sector pay freeze, with wage increases for 2.6 million workers including teachers, police and civil servants.
The Chancellor said he would set out a “new pay policy” on Wednesday, after imposing the freeze last November from which only NHS staff and public servants earning less than £24,000 were exempted.
Asked if public sector workers could expect pay increases, Mr Sunak said: “That will be one of the things that we talk about in the spending review.
“Obviously over the past year, we took a decision to have a more targeted approach to public sector pay, given that the year before there were large increases and obviously the private sector was seeing pay decreases last year, and people were on furlough.”
Speaking on The Andrew Marr Show on BBC One, he added: “We thought that was reasonable and fair. Now going forward, we’ll have to set a new pay policy and that will be a topic for next week’s spending review.”
On Monday, the Chancellor is also expected to receive recommendations from independent advisers for an increase of more than five per cent in the national living wage, the minimum wage paid to people aged over 23.
He is expected to back them as part of the Prime Minister’s drive to shake off the “old broken model with low wages, low growth, low skills and low productivity”.
For public sector pay, Mr Sunak would set the terms for the independent pay review bodies to recommend specific wage rises, based on what each Whitehall department can afford and relative earnings growth.
Leading economists and financial experts said a continued “pause” in public sector pay rises was unsustainable, with wages in many other sectors increasing and Boris Johnson calling for a move to a “high-wage, high-skill” economy.
“It could be justified last year because private sector workers were having a particularly hard time at that moment,” said Carl Emmerson, the deputy director of the Institute for Fiscal Studies.
“But it would be pretty hard to extend it without getting into big problems with recruitment and retention given how much squeeze on public sector pay there has been over the last decade. I think it would be extremely risky to continue it.”
Torsten Bell, the chief executive of the Resolution Foundation, said: “A pause does not fit with what the Prime Minister is saying, which is that the route to a stronger economy is faster wage growth. You cannot have that and say for ‘x’ per cent of the workforce, there is a pay freeze.”
Mr Sunak also refused to rule out further tax rises before the next election, despite the 1.25 per cent rise in National Insurance to raise £12 billion a year in order to overhaul social care.
He said his instincts were for low-tax Conservatism, but this had to be balanced by the Government being hit by “the biggest economic shock that we’ve experienced in 300 years” and borrowing levels “not seen since the Second World War”.
The Government could also be hit by rising inflation at four or five per cent, which would increase the cost of borrowing, although the Chancellor said he was setting aside “resilience” funds as a contingency for such an eventuality.
Despite this, he pledged that at the centre of his Budget would be “strong investment in public services, driving economic growth by investing in infrastructure, innovation and skills”.
On Sunday, he confirmed £3 billion for post-16 education and adult retraining, including a quadrupling in skills boot camps in areas such as artificial intelligence, cyber security and nuclear.
Ageing Border Force cutters will be replaced by 11 new vessels in a £700 million investment to improve border security. It includes £628 million “to modernise and digitalise the border”, with proposals including a US-style electronic system of travel authorisation for tourists wishing to come to the UK.
Mr Sunak also announced a £435 million package of measures aimed at preventing crime, with a focus on violent offences against women through better CCTV and improved street lighting.
A £1.4 billion fund will be set up to funnel money into key innovative sectors by handing out grants to encourage internationally mobile companies to invest in the UK’s critical industries, including life sciences and automotive.