Jeremy Hunt could offer striking public sector workers a bigger pay rise ahead of his budget next month, scrapping plans for a £6 billion fuel tax freeze, according to a top spending and tax watchdog. .
With new strike waves planned across the public sector next month, Institute for Fiscal Studies (IFS) director Paul Johnson said the chancellor faces a “straightforward choice” between subsidizing car driving and helping public sector workers. public sector to deal with the costs of living crisis.
He said concerns that an average pay rise of 5.5% – adding £5bn to the bill for this year’s deal – would trigger a new round of inflation were overblown because the effect would be “extremely small” compared to the size of the economy as a whole.
“If, as we expect, we have yet another fuel rate freeze, that would be a £6bn tax cut for the year and indeed a cash injection into the economy. And there’s a straightforward choice, £6 billion is a long way to go if you’re spending that on public sector wages rather than cutting fuel taxes,” he said.
“Assuming the Treasury creates an extra 2% or 3% for public sector workers, we are talking a few billion pounds out of a £2 trillion economy. The likelihood of inflation having a major impact on this is extremely small,” she added.
Hunt has rejected calls for the government to offer civil servants a bigger pay rise, arguing it would cost £28 billion and increase inflation, forcing the Bank of England to raise interest rates further.
In its budget forecast, the IFS said it disputed the Treasury’s figures, arguing that the cost of an increase from the current average supply from 3.5% to 5.5% could be even less than £5 billion. He said between 30% and 40% of the salary increase would be recouped in higher VAT, income tax revenues and national insurance payments, bringing the cost down to around £3bn.
The chancellor is under intense pressure to please different wings of his party, seeking an improvement in public services, an end to strikes in the public sector and a reversal of recent increases in personal and corporate taxes.
Defense Secretary Ben Wallace has made a bid for extra funds, while Health Secretary Steve Barclay wants a bigger budget to fulfill Rishi Sunak’s pledge to cut NHS waiting lists by the end of the year.
Johnson said that ahead of Budget Day on March 15, official numbers were likely to show that public finances had benefited from better-than-expected economic growth over the past four months.
The more optimistic scenario has already prompted the Bank of England to revise last year’s dismal growth forecasts, which predicted the UK would suffer its biggest recession in 100 years. New forecasts showed the recession would only last half as long and an earlier forecast of a 3% drop in gross domestic product (GDP) was revised to 1%.
The IFS said the improved situation meant public finances were on track to be £31bn in the black over the next five years, but warned that the extra funds were vulnerable to downward revisions.
Projections by the Treasury’s independent analyst, the Office of Budgetary Responsibility, will follow the budget and are likely to show that the UK economy struggles to grow over the next five years.
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Low investment and high interest rates will limit the economy’s ability to grow, depressing tax collections in later years.
Johnson said it would be unwise for Hunt to promise tax cuts and higher public spending when the reasons for the tax increase – lower debt interest payments, lower energy price guarantee payments and higher tax revenues – were likely to be temporary.
While taxes have been between 33% and 34% of national income, or gross national product (GDP), for decades, they are poised to rise and remain high, Johnson said.
“They are now predicted to reach 37% of national income in a very short period. This is a big tax hike and one we’ve been warning about for a long time. And I don’t think they’ll come down in my lifetime. We had a climb that will continue,” she said.
“It’s easier to deal with a low tax-to-GDP ratio if the economy is growing strongly, but if growth continues to be as miserable as it is currently projected, we’re going to have to have a very serious discussion about whether that means we’re going to have more public services. miserable than we would like or higher taxes.”
He said that, in the longer term, the extra costs of health care provision, long-term care and defense spending would prevent governments from cutting taxes back to previous norms.