Government’s £28 billion public sector pay increase figure doesn’t factor in money returned in tax

13 December 2022
What was claimed

If everyone in the public sector had a pay rise in line with inflation, it would cost an extra £28 billion.

Our verdict

This is the difference between the expected wage bill this year and if it was increased by 11%. There are questions about how useful a calculation this is, but regardless, the cost would be lower than £28 billion because some of this would come back via taxation on salaries.

"If everyone in the public sector had a pay rise in line with inflation, it would cost an extra £28 billion, an extra £1,000 per household."

The government has claimed that increasing pay for all public sector workers in line with inflation would cost £28 billion, and that this is the equivalent of £1,000 per household.

Full Fact contacted the Treasury to ask how it calculated this figure, and it told us it is an estimate of the difference between the public sector pay bill this financial year (2022/23), and next financial year, if all workers got an 11% pay increase next year (based on current CPI inflation.) 

However, many of the ongoing public sector disputes relate to pay decisions taken this year, leading to criticism that this may not be the most relevant calculation to consider when looking at the current situation. 

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The Treasury’s calculations

Last financial year (2021/22), the public sector pay bill was just under £233 billion.

This year, the Treasury told us it estimates the pay bill will be about 5% higher (putting it at about £244 billion).

If this rises by 11% next year, it will reach around £271 billion, or £27 billion above what it is this year. 

On top of this the Treasury said “pay drift and workforce growth” would have some effect, and so came up with a final figure of around £28 billion, if pay next year was increased by 11% compared to this year.

Dividing this increase between roughly 28 million UK households gives a figure of around £1,000 per household, which the Treasury described as “illustrative.”

How relevant is this figure?

One issue with this calculation is that it reflects the change in the pay bill from 2022/23 to 2023/24, but many of the ongoing pay disputes are about the level pay has already increased by in 2022/23 compared to 2021/22.

For example, the Royal College of Nursing are going on strike over the pay increase nurses were given in 2022/23. 

If, instead, all the pay increases made in 2022/23 were further increased up to 11%, the Consumer Price Index (CPI) inflation figure for October 2022, this would cost less than “£28 billion extra”.

This is because, firstly, the increase would be calculated relative to the 2021/22 pay bill of £233 billion, not the estimated 2022/23 pay bill of around £244 billion.

Secondly, the amount “extra” this would cost the government wouldn’t be the full 11%, because the pay bill has already increased by around 5% in 2022/23.

The Institute for Fiscal Studies (IFS) has produced estimates suggesting the “extra” cost involved in increasing that 5% to match inflation (based on a slightly lower inflation rate of 10.5%) would be around £13 billion.

Justifying its decision to calculate the difference in the pay bill between 2022/23 and 2023/24, the Treasury told us this was appropriate given that pay has been set for this year and we are nine months through the pay year for most workforces.

However, IFS economist Ben Zaranko has said this raises the question as to the value in using current inflation figures to estimate how much public sector pay would rise next year, especially as inflation is expected to be much lower next year.  

It’s worth noting that some public sector workers are asking for higher-than-inflation pay increases. For example, the Royal College of Nursing is asking for an increase of 5% above inflation.

What about tax?

The above figures only refer to the amount in extra direct expenditure that would result from further pay increase for public sector workers.

But some of this expenditure would be recouped by the government from the tax paid on this higher pay, meaning the net cost to the government would be somewhat lower.

The amount of extra tax paid would vary depending on the wage of each public sector worker.

We’ve asked the Treasury how much it would expect to recoup through increased tax payments from public sector workers following an inflation-matching pay increase— the BBC has reported that it could get back as much as a third. 

The Treasury told us that it was unable to model this impact, but said that higher public sector pay would also lead to public sector employers paying more in employer national insurance contributions.

As well as the direct tax revenue, there would likely be some indirect tax revenue resulting from increasing public sector pay (such as tax collected on goods and services purchased by public sector workers, out of their increased pay).

£1,000 per household

The claim this would cost £1,000 per household, which has also been made by the Prime Minister, refers to the government’s £28 billion figure, divided by all 28 million UK households. 

Leaving aside the fact that this figure would be substantially lower based on the IFS’s estimates of the cost of implementing inflation-matching pay increases for all public sector workers this year, this figure is, of course, only illustrative.

Each household wouldn’t actually end up paying the same amount towards any costs associated with increasing public sector pay.

Image courtesy of UK Government

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