In the public sector, wages are expected to rise 5% this year, which is higher than forecast when the spending plans were created in 2021, but about half the current rate of inflation.
The government will need to find 5 billion pounds ($5.6 billion) this year alone, the think tank warned on Saturday, just to pay those awards without increasing borrowing.
The report highlights the difficulty Chancellor of the Exchequer Kwasi Kwarteng is having to maintain public finances without going back on any of his tax cut promises. His tax giveaways aren’t the only thing putting pressure on the economy; higher spending has also made any attempt to stabilize debt as a proportion of GDP more difficult.
Markets plunged last month when Kwarteng suggested a £45bn fiscal stimulus amid concerns that borrowing would not be exhausted.
On November 23, he intends to release a comprehensive fiscal plan that includes a forecast from the Office for Budget Responsibility that takes into account government initiatives and the effects of changes in the outlook for the economy. The Treasury can advance the deadline.
According to the IFS, the elimination of around 100,000 jobs this year would maintain the wage bill as a whole and avoid budget cuts in other ministries. In 2023, if wages rise in line with inflation, the government would have to cut another 100,000 jobs in order to balance the budget.
Finding internal “efficiencies” has been forced on departments, which is often seen as code for layoffs. With the public sector workforce increasing by 250,000 during the pandemic to more than 5.5 million, there may be an opening.
Plans to cut around a quarter of the 500,000-strong civil service — those who serve the government directly — are already being pushed through by the government. It claims the staff cut could mean annual savings of £3.5 billion.
Kwarteng promised not to roll back previous measures, but suspended a tax cut for the wealthiest households who had saved £2bn of the £45bn.
He has refused to rule out a £5bn drop in benefits, which has sparked displeasure among members of the ruling Conservative Party as it would disproportionately affect people already struggling to make ends meet.
The Bank of England’s quantitative easing program may also be modified in the government’s intentions to reduce annual debt interest costs by at least £5 billion.
Public sector workers such as nurses and teachers are threatening to strike over low pay, which will increase pressure on spending.
There are no “easy options”, according to Bee Boileau, research economist at the IFS.
“Offering higher wage awards without additional funding puts a huge strain on departmental budgets and requires painful cuts elsewhere,” he said “Not offering higher wage awards risks a wave of strikes and ongoing challenges with recruitment and retention”.
The analysis comes from a chapter of the IFS 2022 Green Budget that has already been issued and was created in partnership with Citi and funded by the Nuffield Foundation.