Public sector pay rises could harm UK economy

Simon Rothenberg,  Partner said:

In her financial statement, Rachel Reeves announced £9.4bn of public sector pay rises. Many of these are well deserved and a catch up for reduced pay caused by wages not rising in line with inflation, but there is a real risk that this will contribute to a short-term increase in inflation. Pay rises will put more cash in the pockets of public sector workers, which will likely be spent and increase inflation compared to the pay rises not being given.

This could lead to the recent reduction in inflation being reversed – and in turn harm the economy. As increased inflation raises the cost for businesses who borrow money to expand or start up, and for investors wanting to invest in those businesses.

The public sector pay rise could also affect individuals working in the private sector. The previous government has not risen public sector pay in line with inflation for the last two years. This was to avoid compounding the increase in the cost of living which all people in the UK were experiencing as more inflation means higher prices for food, fuel and other necessities.

But only three weeks into the new government, despite many difficult decisions being made by the new chancellor, including cutting the winter fuel payment for all pensioners not in receipt of pension credit, Rachel Reeves still announced pay rises of up to 22% for front-line public-sector workers.

While the chancellor has talked about difficult decisions having to be made, most of these do appear to be harming the private sector and making entrepreneurs and business owners more reluctant to invest their money.