London Daily

Focus on the big picture.
Wednesday, Dec 31, 2025

Rail strikes: Give public sector workers a pay rise or cut everyone's taxes by 2%? Chancellor left with tough set of choices

Rail strikes: Give public sector workers a pay rise or cut everyone's taxes by 2%? Chancellor left with tough set of choices

Public sector workers have seen their pay fall in real terms by 4.3% since 2010, but giving them a rise in line with inflation would amount to a huge sum, says Sky's Ed Conway.

Imagine, if you can, you are in the chancellor's shoes.

Your instincts are to cut taxes and reduce public spending yet pretty much every decision you've taken in office has involved doing precisely the opposite.

Worse: in recent months, even when you have forked out serious sums to support workers, much of that money seems to have gone unnoticed.

This year alone you have unveiled two genuinely generous packages which will cushion much of the blow from higher energy bills and the rising cost of living, yet the prime minister and many of your cabinet colleagues seem to think you need to do more.


And things are about to get even stickier, for even after the rail strikes this week, the summer's trickiest decision is looming: how to navigate the demands from millions of public sector workers for significant pay rises.

They have a point - have seen their pay fall in real terms by 4.3% since 2010 (compared with a 4.3% rise for their private sector counterparts).

Moreover, while it could be argued for most of the past few decades that public sector workers have considerably higher levels of pay (levels - not just annual changes in pay), these days that's not so clear.

While headline pay per hour for public sector workers is still about 7% higher than for private sector workers, when you adjust for differences in working patterns and skill levels (it turns out that on average skill levels in the public sector are higher), actually public sector workers are now earning slightly less than their private sector counterparts - for the first time in at least a generation.


Now, there are some important caveats - notably the fact that public sector workers tend to get much more generous pensions than their private sector counterparts, something the Office for National Statistics reckons is equivalent to a 7% premium on their pay. Even so, it's clear that many state workers have a strong case for pay rises.

And given inflation is so high right now, anything below the predicted CPI level of around 9% this year will mean an effective real terms pay cut, raising the question: how much would it cost to give public sector workers a pay rise in line with that CPI rise?

To find out, we need to take a look at the public finances. In 2021/22 the government spent a grand total of just over a trillion pounds, of which around £230bn was spent on public sector pay. Now, as things stand the Spending Review envisaged pay going up more or less in line with inflation - but at the time that was forecast to be around 2-3%. That would cost around £7bn. So let's imagine that's our starting point.


Now let's calculate what it would cost to increase that £230bn in line with 9% inflation: a back-of-envelope calculation says around £21bn. Subtract the £7bn the government was already assuming it would have to spend and you're left with an additional total of £14bn. That's how much, give or take, would be needed to keep public sector workers' pay rising in line with inflation - a real terms pay freeze.

That turns out to be an awful lot of money. For £14bn you could cut all rates of income tax by 2% - precisely the kind of enormous and eye-catching tax cut the chancellor has been dreaming of for all this time.

That £14bn sum is about the same as the amount the government was trying to raise via the controversial Health and Social Care Levy. You get the idea: this is big stuff.

So the chancellor faces a tough set of decisions. And this is before one considers the wider economic questions. Might raising public sector pay make a wage-inflation spiral even more likely? Might it push the UK towards stagflation?

On the flip side, doing nothing will mean more people facing more financial difficulty and pressure in the face of generational leaps in the cost of living.

Newsletter

Related Articles

0:00
0:00
Close
No UK Curfew Ordered as Deepfake TikTok Falsely Attributes Decree to Prime Minister Starmer
Europe’s Largest Defence Groups Set to Return Nearly Five Billion Dollars to Shareholders in Twenty Twenty-Five
Abu Dhabi ‘Capital of Capital’: How Abu Dhabi Rose as a Sovereign Wealth Power
Diamonds Are Powering a New Quantum Revolution
Trump Threatens Strikes Against Iran if Nuclear Programme Is Restarted
Apple Escalates Legal Fight by Appealing £1.5 Billion UK Ruling Over App Store Fees
UK Debt Levels Sit Mid-Range Among Advanced Economies Despite Rising Pressures
UK Plans Royal Diplomacy with King Charles and Prince William to Reinvigorate Trade Talks with US
King Charles and Prince William Poised for Separate 2026 US Visits to Reinforce UK-US Trade and Diplomatic Ties
Apple Moves to Appeal UK Ruling Ordering £1.5 Billion in Customer Overcharge Damages
King Charles’s 2025 Christmas Message Tops UK Television Ratings on Christmas Day
The Battle Over the Internet Explodes: The United States Bars European Officials and Ignites a Diplomatic Crisis
Princesses Beatrice and Eugenie Join Royal Family at Sandringham Christmas Service
Fine Wine Investors Find Little Cheer in Third Year of Falls
UK Mortgage Rates Edge Lower as Bank of England Base Rate Cut Filters Through Lending Market
U.S. Supermarket Gives Customers Free Groceries for Christmas After Computer Glitch
Air India ‘Finds’ a Plane That Vanished 13 Years Ago
Caviar and Foie Gras? China Is Becoming a Luxury Food Powerhouse
Hong Kong Climbs to Second Globally in 2025 Tourism Rankings Behind Bangkok
From Sunniest Year on Record to Terror Plots and Sports Triumphs: The UK’s Defining Stories of 2025
Greta Thunberg Released on Bail After Arrest at London Pro-Palestinian Demonstration
Banksy Unveils New Winter Mural in London Amid Festive Season Excitement
UK Households Face Rising Financial Strain as Tax Increases Bite and Growth Loses Momentum
UK Government Approves Universal Studios Theme Park in Bedford Poised to Rival Disneyland Paris
UK Gambling Shares Slide as Traders Respond to Steep Tax Rises and Sector Uncertainty
Starmer and Trump Coordinate on Ukraine Peace Efforts in Latest Diplomatic Call
The Pilot Barricaded Himself in the Cockpit and Refused to Take Off: "We Are Not Leaving Until I Receive My Salary"
UK Fashion Label LK Bennett Pursues Accelerated Sale Amid Financial Struggles
U.S. Government Warns UK Over Free Speech in Pro-Life Campaigner Prosecution
Newly Released Files Shed Light on Jeffrey Epstein’s Extensive Links to the United Kingdom
Prince William and Prince George Volunteer Together at UK Homelessness Charity
UK Police Arrest Protesters Chanting ‘Globalise the Intifada’ as Authorities Recalibrate Free Speech Enforcement
Scambodia: The World Owes Thailand’s Military a Profound Debt of Gratitude
Women in Partial Nudity — and Bill Clinton in a Dress and Heels: The Images Revealed in the “Epstein Files”
US Envoy Witkoff to Convene Security Advisers from Ukraine, UK, France and Germany in Miami as Peace Efforts Intensify
UK Retailers Report Sharp Pre-Christmas Sales Decline and Weak Outlook, CBI Survey Shows
UK Government Rejects Use of Frozen Russian Assets to Fund Aid for Ukraine
UK Financial Conduct Authority Opens Formal Investigation into WH Smith After Accounting Errors
UK Issues Final Ultimatum to Roman Abramovich Over £2.5bn Chelsea Sale Funds for Ukraine
Rare Pink Fog Sweeps Across Parts of the UK as Met Office Warns of Poor Visibility
UK Police Pledge ‘More Assertive’ Enforcement to Tackle Antisemitism at Protests
UK Police Warn They Will Arrest Protesters Chanting ‘Globalise the Intifada’
Trump Files $10 Billion Defamation Lawsuit Against BBC as Broadcaster Pledges Legal Defence
UK Says U.S. Tech Deal Talks Still Active Despite Washington’s Suspension of Prosperity Pact
UK Mortgage Rules to Give Greater Flexibility to Borrowers With Irregular Incomes
UK Treasury Moves to Position Britain as Leading Global Hub for Crypto Firms
U.S. Freezes £31 Billion Tech Prosperity Deal With Britain Amid Trade Dispute
Prince Harry and Meghan’s Potential UK Return Gains New Momentum Amid Security Review and Royal Dialogue
Zelensky Opens High-Stakes Peace Talks in Berlin with Trump Envoy and European Leaders
Historical Reflections on Press Freedom Emerge Amid Debate Over Trump’s Media Policies
×