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The Progressive Policy Think Tank

Uncapped potential: The fiscal and economic effects of lifting the public sector pay cap

The UK needs a pay rise. Real median (average) household incomes are today only five per cent higher than they were in 2007 and the country is in the worst period of pay growth in 150 years, exposing serious weaknesses in the UK’s economic model. The focus of government economic policy must now be to raise pay and productivity across the entire economy, and it is critical that the public sector is not left behind.

The public sector has faced seven years of consecutive pay squeezes, with real terms cuts in salary at every level. Both public sector organisations covered by pay review bodies and the majority of those where wages are set by collective bargaining have been subjected to the squeeze. Raising public sector pay stands alongside welfare reform and boosting private sector productivity and earnings through industrial strategy as a key part of the response to the country’s crisis in living standards.

In this briefing, we argue that government should revise its policy on public sector pay as part of a wider strategic intervention to raise earnings across the economy, in both the public and the private sectors, and we set out three principles to guide government and pay review bodies in lifting the public sector pay cap.