Jeremy Hunt has told ministers there will be no extra money to give millions of public sector workers an average 6% pay rise, potentially leaving departments facing a difficult choice between raising salaries or cutting frontline services.
The Guardian understands the chancellor has ruled out providing a further cash injection beyond what is already budgeted if Rishi Sunak decides to implement the recommendations of independent pay review bodies, which are expected as soon as Thursday.
Government sources said the decision over whether to back the proposal for no more funding would only be made once the prime minister was back from the Nato summit in Vilnius on Wednesday night and had gone over the figures. “There’s definitely still contention in this,” one said.
Senior Conservatives are concerned they will have to cut frontline services across education, health and policing if they are expected to fund the estimated £5bn difference between budgeted increases of 3.5% and the pay review body recommendations.
However, Treasury insiders said the salary proposals for 2023-24, which sources said ranged from 5% to 6.5%, could fuel further inflation and even set off a wage-price spiral, where increasing disposable income raises demand for goods.
In his Mansion House speech on Monday night, Hunt said any pay rises must not be funded from additional borrowing or tax rises. Treasury sources suggested his words were aimed as much at his fellow Conservative ministers as the wider public.
“Delivering sound money is our number one focus. That means taking responsible decisions on public finances, including public sector pay, because more borrowing is itself inflationary,” Hunt said.
“It means recognising that bringing down inflation puts more money into people’s pockets than any tax cut. And it means recognising that there can be no sustainable growth without eliminating the inflation that deters investment and erodes consumer confidence.”
Sunak also said on Saturday that giving unaffordable pay rises would be “shortsighted” and that any increases would have to abide by his principles of “fairness, affordability and responsibility”.
On the plane to Lithuania on Tuesday, Sunak was downbeat about the prospect of following the independent bodies’ recommendations, with Downing Street insiders suggesting he would be “quite tough” when analysing the impact on the wider economy.
When asked whether departments would have to use their existing budgets to fund pay rises, he said: “There’s three principles that are guiding us. We want to be fair, we want to do things that are affordable for the taxpayer and we need to be responsible.”
“The chancellor is right to highlight the importance of excess government borrowing on inflation … the government has to act in a way that is responsible given the economic context that we face and in particular the rise in borrowing costs that most countries are currently experiencing.”
Sunak added: “It’s absolutely vital we bring inflation down, government should not fuel the fire by excessive borrowing at a time when that would just make the situation worse.”
Gillian Keegan, the education secretary, Steve Barclay, the health secretary, Ben Wallace, the defence secretary, Alex Chalk, the justice secretary, and Suella Braverman, the home secretary, are all said to be pushing Sunak to back the review bodies.
Sunak and his ministers spent much of last year arguing they had to abide by the independent bodies’ below-inflation pay proposals during strikes when unions were demanding more. Ministers have ignored the advice just four times in the last 10 years.
The Bank of England governor, Andrew Bailey, joined the chancellor’s calls for wage restraint at the Mansion House on Monday, telling a City of London audience that high pay settlements were hitting the fight against inflation, which stands at 8.7%.
However, annual private sector wage growth increased to 7.6% in the three months to April, according to the latest official data. Downing Street said that Sunak did not believe that those working in the public sector deserved less than those in the private sector.
His official spokesperson said: “No. I think that obviously it’s for private companies to set their pay as they see fit … we want to agree fair and reasonable pay offers [with public sector workers].”
The work and pensions secretary, Mel Stride, told LBC radio the government had to make sure that wage pressures were “moderated” as they contributed to the “stickiness” of inflation.
He added: “That’s why it’s so important that the government takes a relatively firm and robust approach to public pay settlements and there’s no way, unfortunately, that we can duck that because if those settlements are too high that will feed into those problems.”
Pressed on whether the government would accept the recommendations of the pay review bodies, he said the government would be “absolutely unwavering” in its mission to reduce inflation.