Raising public sector pay in line with inflation at the Autumn Budget next week would cost £3.3bn by 2020, according to new analysis by a think tank due to be published today.
While the gross cost to the Exchequer of a pay rise for government employees would be £5.8bn, the net effect on the public purse would be significantly lower because of a higher income tax take and lower benefit bill, according to the Institute for Public Policy Research (IPPR).
The rise of inflation over the past 18 months has dragged back real wages, lowering living standards across the UK economy and delivering a headache for the chancellor, Philip Hammond, ahead of the Budget on 22 November.
Hammond has faced strong pressure from opposition and within his own party to find the money to ease the effects of inflation, but lower productivity forecasts from the Office for Budget Responsibility mean he will have less elbow room to increase spending while hitting his self-imposed deficit reduction targets.
Weak wage growth has plagued the UK economy, in part because of the same lack of productivity growth. Wages grew by 2.2 per cent in the year to August, while inflation in the year to October hit three per cent.
Alfie Stirling, IPPR senior economic analyst, 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.”