The UK needs to cut 200,000 government jobs in the next two years to avoid adding billions to the national debt, according to the Institute for Fiscal Studies.
Public sector wages are on track to rise by 5% this year, about half the current rate of inflation, but higher than budgeted for when spending plans are in place in 2021.
Simply to pay those premiums without increasing borrowing, the think tank said on Saturday, the government would need to save 5 billion pounds ($5.6 billion) this year alone.
The analysis highlights the challenge facing Treasury Secretary Kwasi Quarting in keeping the public finances in check without reneging on his promises to cut taxes. The pressure comes not only from his financial donations, but also from increased spending, which complicates any plan to stabilize debt as a percentage of GDP.
Last month, Kwarteng announced a £45 billion fiscal stimulus that sent markets crashing over fears that lending could spiral out of control.
On November 23, he plans to unveil a full financial plan with forecasts from the Office of Budget Responsibility that will incorporate government policies and the impact of changes to the economic outlook. The Treasury may advance the appointment.
The IFS said cutting about 100,000 jobs this year would ensure the overall wage bill stays the same and prevent cuts in other departments. If wages rise with inflation in 2023, the government will have to cut another 100,000 jobs to keep the bill in check.
Required competencies
Departments have been told to look for “talks” internally, which is often seen as a symbol of job cuts. There is a potential opportunity as the public sector workforce has grown by 250,000 during the pandemic to around 5.5 million.
The government is already pushing through plans to cut about a fifth of the 500,000 civil servants, those who work directly for the government. She says downsizing could save £3.5bn a year.
Kwarteng rescinded the tax cut for wealthier households that saved £2 billion from £45 billion, but vowed not to roll back other policies.
He refused to rule out a £5 billion cut in benefits, sparking a backlash within the ruling Conservative Party as it would hit those least able to afford them during the cost of living crisis.
The government may also consider plans to change the treatment of the Bank of England’s quantitative easing program to reduce the annual debt interest bill by £5 billion or more.
Public sector workers, including nurses and teachers, are threatening to strike for low wages, putting more pressure on spending.
There are no “easy options” for the advisor, said B. Boelu, an economic researcher at IFS.
“Providing higher salary bonuses without additional funding puts enormous strains on departmental budgets and requires painful cuts elsewhere,” he said. “Failure to offer higher pay bonuses threatens to trigger a wave of strikes and ongoing challenges in hiring and retention.”
The analysis is from a previously published chapter of IFS Green Budget 2022, which was produced in partnership with Citi and funded by the Nuffield Foundation.
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