Public sector pay cuts proposed by Rachel Reeves could fuel another rise in inflation and “encourage unions” to strike, an economist has warned.
Professor Costas Milas, from the University of Liverpool, said the Chancellor’s pay bonanza could force the Bank of England to delay interest rate courteous.
He said the deals for millions of workers could trigger a corresponding rise in private sector wages, which would increase inflation.
And Professor Milas predicted that union barons would “negotiate harder”, which could cause even more suffering for families.
Professor Milas wrote in a blog for the London School of Economics: “Higher growth in real government profits affects inflation indirectly through its impact on real private profits. The impact on inflation is not felt immediately. Instead, it takes up to four quarters to show up in the inflation data.
“It looks like a new wave of strikes in the UK could be on the way as pay deals spur unions to negotiate harder. Such strikes will raise wages throughout the economy and increase (significant) inflationary pressures.
“In terms of policy, the results here suggest that the latest public sector wage increases will trigger inflationary pressures from the second half of 2025 onwards.
“My results suggest that it may be prudent to resist the pace of monetary easing that financial markets currently expect.”
The Chancellor has already announced that the government would accept the recommendations of pay review bodies to give millions of public sector workers above-inflation pay rises of between 5% and 6%.
Junior doctors will receive pay rises of around 20% over two years, while a multi-year pay offer has been made to train drivers, in a bid to resolve long-running pay disputes and end strikes.
Ms Reeves told the Guardian the government wanted to “draw a line” on strikes because of their cost to the economy, saying: “We have not given in to any demands.
“We didn’t do that with the train drivers or the junior doctors.”
She noted that there are “huge recruitment and retention problems” in the military, education and the NHS.
Amid calls for “pay restoration” deals to reverse real pay cuts for public sector workers, Ms Reeves said: “(Prime Minister) Keir Starmer and I decide our policy, not the unions.
“There are no blank checks.”
Meeting the 2024-25 pay proposals will cost £9.4bn more than the previous Conservative government’s budget.
Last month, Ms Reeves said she would ask government departments to save at least £3 billion to help fund them, including by cutting non-essential spending on advice and communications.
Last month, Ms Reeves said she would stop winter fuel payments for people in England and Wales who do not receive pension credits or other means-tested benefits.
The policy is expected to reduce the number of pensioners receiving the payment by 10 million, from 11.4 million to 1.5 million, saving around £1.4 billion this financial year.
On Thursday, the Government presented to Parliament regulations to make the change.
The Social Fund’s explanatory statement Winter fuel payment The 2024 Regulation states: “The measure is a response to the substantial pressures facing public finances this year and next.
“While making the necessary savings for the Treasury, it maintains support for retired families with the lowest incomes.”
The regulations are expected to come into effect on September 16.
MPs could try to challenge the regulations in the House of Commons, which returns from summer recess on September 2, although the government has a majority of 167 votes.
At the Trades Union Congress’s annual conference in September, hardline unions will press the government to spend up to £50bn to restore real public sector wages to 2011 levels.
The Public and Commercial Services Union (PCS) is the main force behind the far-left conspiracy, promoting a conference motion which argues: “Pay levels have fallen by an average of 1.5 per cent a year since 2011.”
“Public sector wage restoration must be a key feature of our campaign with the new government.”
FBU leader and TUC chairman Matt Wrack appeared optimistic about the planned demand to raise money, telling the Financial Times he expected the motion to pass.
To meet the terms of the union’s demands, if the motion is passed, Labour would be forced to offer a 20% pay rise on average across all sectors.
Economists estimate that each percentage point increase would cost struggling taxpayers £2.5 billion.