Chancellor says schools and hospitals must make savings to fund recommended pay rises

ITV News Political Editor Robert Peston explains Jeremy Hunt's Mansion House speech pledges from pensions to pay rises.

The Chancellor of the Exchequer tonight told ministers running big departments like health and education that if they want to give recommended pay rises to nurses, teachers and other public sector workers they'll have to make cuts elsewhere.

In doing so, Jeremy Hunt exposed a fractious argument at the heart of Rishi Sunak's cabinet.

In his annual address to bankers and City notables at the Mansion House, he said: "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."

This is public confirmation that the Treasury is opposing the use of debt to give officially recommended pay rises to nurses, teachers and civil servants. This may sound technical and uninteresting, but its implications will be seen as terrible by public sector employees.

The point is that the pay review bodies, which advise government on the magnitude of pay rises, are understood to have recommended pay increases of around 6% to 6.5%.

This is significantly less than the rate of inflation and less than current pay rises for private sector employees. But it is two or three times what departments were expecting to pay when their budgets were set a couple of years ago.

According to Paul Johnson, of the Institute of Fiscal Studies, each one percentage point increase in pay costs the public sector as a whole an additional £2.5bn. So, if the pay rise were awarded to all public service workers, it would cost the public sector an estimated £10bn more than expected.

If the 6% or so rise were restricted to nurses, other health service workers and teachers, it would cost around £5bn more than expected.

So, if the Treasury won't borrow to fund the pay rises (and there is zero chance it will put up taxes) that means schools, hospitals and other parts of the public sector would have to make billions of pounds of savings and cuts to cover them.

At a time when so much of the public sector is both short of skilled people and when resources for front line services are stretched, this is a nightmare for schools, hospitals and other services. The chancellor is saying either they have to forgo the pay rises or make cuts elsewhere.

Either route would be seen as a catastrophe by many in the public sector. If pay doesn't rise, the chronic shortage of staff with important skills will become much worse. And if there are cuts to finance the pay rises, schools, hospitals and other frontline operations may struggle even more to provide basic services.

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