The big question facing Rishi Sunak- how to fund a public sector pay rise?

ITV News Politics Editor Robert Peston reports on the government's latest settlement

The absolute key when Rishi Sunak announces pay rises for public sector workers today, will be - how are they funded? The Chancellor Jeremy Hunt made clear on ITV1’s Peston last night that he would not borrow any more money to pay for increased wages. That's in part a response to the surging cost of borrowing in the UK- where government bond yields are significantly higher right now than in the US or EU. But he, and other ministers, are also acutely aware that funding matters a huge deal to the sectors involved.

Whenever I speak to individual heads, teachers, or union sources, they make clear that the 6.5% recommended by the pay review body would be enough to stop strikes but only if it was "properly funded". They think the Department for Education has budgeted for 3.5% so needs another 3%. If that doesn't come from borrowing - where does it come from? I suspect that ministers are going to make an argument about how to cover the money without making cuts from elsewhere in the education budget. But the question then will be - are teachers persuaded? The challenge is harder in health, where doctors are asking for 35% - almost 6 times what the review body is likely to be recommending.

With junior doctors out now until Tuesday and then consultants out from Thursday, the challenge for Rishi Sunak with them is immense. Not because people are hugely sympathetic to doctors (polls suggest their nursing colleagues get way more sympathy) but because their strike action is hugely impactful, resulting in another 100,000 cancelled appointments and increased pressure on record waiting lists.

Junior doctor and members of the British Medical Association on the picket line on Thursday Credit: Danny Lawson/PA

Beyond that are police officers and prison officers who can't strike but will be upset if their lack of ability to legally take a stand means they are the ones who are offered below recommendations. For the government the mantra remains on inflation. The chancellor argues that halving inflation is the best way to put money in people's pockets. But are public sector payrises of this level inflationary?

Experts at the institute for fiscal studies tell me they are unlikely to be if funded by tax rises.

And even with borrowing the impact would be slight - and then it's for the Bank of England to respond to that. Besides there are other options for Mr Hunt to support the Bank with fiscal measures. He could raise VAT - that would take money out of the economy quite quickly - but has the complication of raising prices in the first instance.

He could tax profits, which are a much bigger component of inflation right now than wages anyway, though that would not work quickly.

Or they could raise income tax. The won't do any of those things, but it's important to note that there is a choice here.

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