A significant portion of funding required to lift the cap would be returned almost immediately to the Treasury, according to research from the Institute for Public Policy Research (IPPR) thinktank.
The analysis precedes the chancellor’s budget next week, as pressure grows on the Conservatives to make a break with austerity amid a slowdown in the economy before Britain leaves EU.
While increasing public sector pay in line with inflation would cost £5.8bn by 2019-20, workers would pay more tax on their higher earnings, come off benefits, and spend more money in the economy. That would cut the net cost of the policy change to the public finances to £3.3bn, according to the study.
The IPPR also suggests the government should guarantee funds for public sector workers with a “double lock” on pay, linking earnings to inflation or private sector wages, whichever is highest. According to the TUC, some in the public sector have seen their real earnings fall by more than £4,000 in real terms since 2010.
Average weekly earnings for all workers have failed to keep pace with rising inflation, despite the lowest levels of unemployment since the 1970s. The IPPR estimates Britain is experiencing the longest period of sustained pay stagnation in 150 years.
Some union leaders have called on the government to lift public sector pay well above the rate of inflation next year to offset the effect of seven years of frozen earnings.
George Osborne introduced the cap in 2011-12, arguing that while public sector workers had not caused the recession in the wake of the financial crisis, they must “share the burden” to restore the public finances to health through austerity.
The pay freeze was followed by five years of wages being effectively capped at 1%, and the government is planning to extend this up until 2019-20.
However, a catch-up pay rise in line with private sector earnings plus an additional 1% would cost the Treasury £12.7bn in 2019-20. Still, the IPPR estimates the final cost to the government would be £7.2bn, including an additional £1.75bn in economic growth.
Alfie Stirling, a senior economic analyst at the IPPR, said:“The costs of raising pay for public service workers are not trivial, but their contribution to the rest of the economy is invaluable.
“Public goods, such as health, education and law and order, are the foundations upon which successful private commerce is built.”
A government spokesperson said: “Public sector workers, including NHS staff, do a fantastic job and the government is committed to ensuring they can continue to deliver world-class public services. We have already confirmed that the across-the-board 1% public sector pay policy will no longer apply to pay awards for 2018-19.
“Public sector pay packages will continue to recognise workers’ vital contributions, while also being affordable and fair to taxpayers as a whole.”
This article was written by Richard Partington Economics correspondent, for theguardian.com on Wednesday 15th November 2017 00.01 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010