Pay rises in the public sector could mean higher interest rates and also higher prices of goods.
The warning from the Treasury comes as unions warn that the Government needs to more than match inflation rates.
In October, Chancellor Rishi Sunak said public sector pay would be allowed to increase again after a temporary freeze because of the pandemic.
But on Tuesday, the Treasury said significant increases in pay for teachers, doctors, police and civil servants would undermine government plans to recruit more staff.
Speaking on the government’s commitment to boost the capacity of the NHS as well as train half a million teachers, and hire around 20,000 extra police officers, the treasury said: “pay rises above affordability could materially impact HMG’s ability to deliver on these and other commitments.
The warnings were made in a document submitted as evidence to the pay review bodies that advise government departments on salary increases.
It also said these increases could mean inflation could rise and stay higher for the long term. According to the Exchequer, the pay rises were too generous and urged the pay decision makers to act with caution on the advice they had received.
The Treasury called for “public sector earnings growth over the next three years (to) retain broad parity with the private sector and continue to be affordable.”
Warnings across the board
Ben Broadbent is the Central Bank’s deputy governor and responsible for monetary policy. He said that the high levels of vacancies are likely to persist for longer than previously expected, as the jobs market adjusts to changes in the economy brought on by the pandemic.
Meanwhile, the Confederation of British Industry, the UK’s leading business lobby group, cut its economic growth prediction by almost 2 percent to 6.9 percent.
According to the accounting firm KPMG says the Omicron variant has really impacted the UK and it expects growth to reach at most 4.2 percent next year. This, it says, even if the Omicron variant turns out to be a “false alarm”.
The union Unite said a 4 percent pay rise was more of a “real terms pay cut” due to inflation. It had been referring to why more than 6,000 Tesco workers would not accept a 4 percent pay rise and plan to strike on December 16th.
Inflation going up in 2022
The Treasury, meanwhile, said inflation is expected to peak at 5 percent in April 2022 possibly because of rising energy prices and supply chain shortages. However, it is later expected to get back to the Bank of England’s target of 2 percent. Even so, millions of homes are expected to be affected by the regulator Ofgem raising the energy price cap next year.
Next year Government departments next year submit to the independent Pay Review Bodies on pay rise affordability. It will also create an assessment of recruitment and retention, and then final recommendations are made to ministers.
However, some unions are consulting members over strike action in response to this year’s settlements.