Can Britain afford a pay rise of 3% for 5 million public sector workers?

Image courtesy of  Roger Blackwell

Image courtesy of Roger Blackwell

The simple answer is yes, Britain can afford a significant pay rise for all five million public sector workers. This would be no more than a modest,  inflation-proofing rise - and yet the Conservative Prime Minister roundly rejected the call, and instead laughably raised the spectre of a Greek-style economic collapse! 

The Institute for Fiscal Studies estimates that every 1% increase in public sector pay would cost between £1.5 billion and £2 billion a year. 

If all five million public sector workers were granted a pay rise of 3%, the EXTRA cost to the Treasury - over and above the government's already-promised 1% - would be just over £3 billion a year. This is not a generous pay rise. It would enable public sector workers to just keep up with inflation. In other words, it would prevent inflation eating into the real value of their pay rise. It would not compensate for years of cuts in real wages.  

£3 billion is less than one quarter of 1% of total British Gross Domestic Product.

In other words, giving five million workers a pay rise would cost less than 1/4 of 1% of the nation's annual income. Annual GDP was £1.998 trillion in 2016/17. One per cent of GDP is therefore approx £20 billion. (For more on nominal GDP see public finances databank on the Office of Budget Responsibility's website. Open the excel file, and search last two columns in 'aggregates' tab.)  

If public sector workers were to spend all £3 billion in the economy (and of course many will save some of the pay rise) - many more millions of workers, shopkeepers and firms in the private sector would benefit too. By spending in these sectors, workers would 'multiply' the tax revenues that accrue to government - from VAT paid for purchases and services, to the corporation taxes paid by shopkeepers and firms - as a result of profits made from this additional spending by public sector workers. 

If we include workers' own income tax and national insurance payments into this mix of tax revenues for Her Majesty's Treasury, almost 40% of the £3 billion spent on a 3% pay increase for 5 million workers would return to the government in the form of tax revenues.

Those revenues would help pay for government borrowing. They would help reduce both the deficit, and public debt as a whole.  

Its not rocket science.