Civil servants face two-year pay squeeze

Kwasi Kwarteng on the BBC's Sunday with Laura Kuenssberg show - AFP
Kwasi Kwarteng on the BBC's Sunday with Laura Kuenssberg show - AFP

Millions of public sector workers face a two-year pay squeeze as the Government abandons plans for a new spending review.

Liz Truss dropped proposals for a new review that she made during the Tory leadership contest, as Kwasi Kwarteng, the Chancellor, vowed to cut more taxes in a gamble for growth.

The last review, which set out the "envelope" for public spending over a three-year period, was done last year before the Russian invasion of Ukraine when inflation was expected to peak at four per cent.

With inflation now expected to rise to 11 per cent in the autumn and remain high for much of next year, it leaves civil servants facing real-term pay cuts before the 2024 General Election.

The Chancellor has meanwhile said there is "more to come" on tax cuts before a budget in the new year, despite sterling hitting a 37-year low in the wake of his "mini-budget" last week.

Mr Kwarteng announced a £45 billion package of tax cuts last Friday, including scrapping the 45p income tax rate and cutting the basic rate by 1p in the pound.

He is now said to be looking at increasing the annual allowances on pension pots and raising income tax thresholds.

Overnight in Asia and Australia, the pound fell to an all-time low against the dollar after Mr Kwarteng hinted at more tax cuts.

One former minister warned that Britain could end up being treated like a "banana republic" thanks to unsustainable borrowing, according to The Times.

Mr Kwarteng, however, said the pandemic and the war in Ukraine were "multigenerational events" and that the Government had to respond in an expansive way.

"We've got to have a much more front-loaded approach to growth, and that's what my Friday statement was all about," he said.

"If we get business back on its feet, we can get this country moving and we can grow our economy."

Torsten Bell, of the Resolution Foundation, said: "The reality of double digit inflation will tightly squeeze the budgets of schools and hospitals, as well as households.

"Higher-than-expected energy bills being absorbed within existing budgets will mean tough choices for those delivering those services.

"In the longer term, there are clear trade-offs between the £45 billion tax cuts announced last week and the quantity and quality of public services."

Paul Johnson, head of the Institute for Fiscal Studies, said: "It is pretty extraordinary. There's a real problem for schools and hospitals doing even the pay rises that they're doing. It's going to be a real squeeze."

A spokeswoman for the Treasury said: "While driving economic growth and tackling high inflation, we will continue to take a responsible and disciplined approach to spending.

"It's more important than ever that departments work efficiently to manage within existing budgets, focusing on unlocking growth and delivering high-quality public services."