Rishi Sunak has warned public sector workers to expect a renewed squeeze on pay and ordered government departments to find cost savings in response to the economic shock unleashed by Covid-19. Against the backdrop of rapidly rising public borrowing after the government pumped billions of pounds into its initial emergency response, the chancellor announced the launch of a comprehensive spending review to set out his longer-term priorities. Suank promised to raise overall spending in real terms to meet the Tories’ manifesto promise to “level up” Britain, but also served notice that cost savings would still need to be found across Whitehall given the scale of the economic shock. On Monday night the Treasury announced an above-inflation pay rise for 900,000 public sector workers this year. But in a letter sent to government departments, the chancellor said that over the next three years “we must exercise restraint in future public sector pay awards”. One union leader described the pay awards as “a smokescreen” to hide bad news. Sunak told ministers the move was necessary for “reasons of fairness” because while average public sector wages had risen over the year to May, private sector pay had fallen due to Covid-19. “It will be vital that public sector pay awards made during the review take into account the wider economic context,” he said. Prompting anger from trades unions and warnings to steer way from austerity, critics said the move echoed the Tory response to the 2008 financial crisis – which included public sector pay freezes in an effort to bring down government borrowing levels. Frances O’Grady, general secretary of the TUC, said: “It’s hard to see how public sector workers can trust ministers after this cynical ploy to disguise plans for more pay restraint. “In the last decade, we learned the hard way that austerity and pay restraint slow down recovery. People have less to spend. Businesses have fewer customers. And it holds back growth.” Sunak’s letter to ministers came just hours after the Treasury had announced that doctors, police, teachers and some other public sector workers in England were to receive above-inflation pay rises this year. However, the pay rises will cover fewer than one in five public sector workers, and exclude nurses and carers. They will also only apply this year, while the spending review will set out the government’s pay policy and wider budgeting plans until 2023-24. The review will also allocate infrastructure spending budgets until 2024-25, and grants for devolved administrations in Scotland, Wales and Northern Ireland. Dave Prentis, general secretary of Unison, said: “The fanfare announcement of more pay for some public service workers was clearly just a smokescreen for something altogether more sinister. “Talking of holding down pay for all the NHS workers – including nurses, paramedics, cleaners, porters and healthcare assistants – and the care, school and council staff who’ve all given so much in the past few months will go down like a lead balloon with the public.” The spending review, due to be completed by the autumn, comes as the first major test for the Tories’ promise to end austerity and level-up economic prosperity as the country emerges from the Covid-19 pandemic. However, it also comes amid growing concern in the Treasury over borrowing levels after official figures showed public sector borrowing hit almost £130bn between April and June as the coronavirus struck – more than double the government’s budget deficit for the whole of last year. Launching the review, the chancellor said “tough choices” would need to be made despite his promise to increase overall government spending above inflation. The Treasury said departments had been asked to “identify opportunities to reprioritise and deliver savings” in response to the economic shock caused by Covid-19. Experts said the move paved the way for real-terms cuts to spending for some departments. Ben Zaranko, a research economist at the influential Institute for Fiscal Studies thinktank, said the chancellor had set the stage for a less generous settlement than planned in March. “We’re not in a period of austerity any more. [However,] some areas might be facing cuts – and that’s not going to be easy for those areas, and it will have real consequences for public services. But it’s the government’s job to prioritise,” he said. Anneliese Dodds, the shadow chancellor, said the announcement covering pay increases for some public sector workers had come as “light at the end of the tunnel” for some frontline workers after a decade of austerity.
“But the language in the chancellor’s announcement on the comprehensive spending review suggests he might be giving with one hand only to take away with the other. This is not the time to fall back on policies that delivered the slowest economic recovery in eight generations,” she said. Asked if austerity was over given the plans to restrain public sector wage growth and find cost savings in some departments, the prime minister’s spokesman said Boris Johnson had been “clear that we will not be responding to this crisis with what has been called austerity”. Earlier on Tuesday figures from the Office for National Statistics showed that public borrowing in the first three months of the 2020-21 financial year jumped to £127.9bn, the highest quarterly sum since comparable records began in 1993. The Office for Budget Responsibility, the government’s tax and spending watchdog, has forecast a deficit of £322bn this year – the highest shortfall in the public finances in peacetime for 300 years.