PolicyLens

Green - Labour market

Add public-pay restoration premiums

Add recurring real-terms public-sector pay rises above inflation from 2027-28.

Last updated: May 2026.

Read the policy-specific methodology note

Paybill baseline

The central case adds a two percentage-point real premium to public-sector pay in 2027-28, on top of inflation protection.

  • Paybill base is GBP 285bn.
  • Two points equals GBP 5.7bn gross.
  • The premium compounds if repeated.

Core trade-offs

Public workers gain real pay restoration. Taxpayers fund the increase unless budgets cut staff, services or investment. Recruitment gains are possible but not automatic.

  • Public workers gain higher real pay.
  • Taxpayers or services pay.
  • Retention savings are not assumed.

Illustrative fiscal impact

+GBP 2.5bn to +GBP 12.0bn. Central estimate: +GBP 5.5bn.

  • Positive numbers mean public-finance pressure; negative numbers mean Exchequer savings.
  • Gross costs are separated from tax, NI and benefit offsets.
  • Private business costs are not automatically fiscal costs.
  • Behavioural responses widen the range materially.
  • This is not an official costing.

Economic impact by 2027-28

  • Jobs: Could support recruitment, but unfunded premiums reduce headcount budgets.
  • Wages: Raises real public pay above inflation, not just preserving it.
  • Prices: Little direct CPI effect; taxes, borrowing or service charges may rise.
  • GDP / productivity: Likely negative if financed by cuts to capital or staffing.

Assessment

A restoration premium is a multi-year fiscal commitment. The case is strongest where pay is causing recruitment failure, but an across-the-board premium spends heavily on workers who may not be in shortage occupations.

Confidence: Low. The first-year paybill is calculable; retention, productivity and multi-year drift are not.

Main risks

  • Compounding cost: A repeated real premium quickly becomes a large permanent paybill increase.
  • Weak targeting: Shortage and non-shortage roles receive similar increases.
  • Service trade-offs: Unfunded premiums can reduce staffing, investment or service volumes.

Safeguards

  • Target shortage occupations first.
  • Publish paybill and headcount effects.
  • Separate one-off settlements from baselines.

Academic evidence

Propper and Van Reenen, Journal of Political Economy, 2010

Can Pay Regulation Kill?

Flat public pay can misallocate staff where local outside wages differ, with service-quality consequences.

Warns against assuming national pay rules automatically improve public-service output.

Can Pay Regulation Kill? (2010)

Autor, Kerr and Kugler, Economic Journal, 2007

Does Employment Protection Reduce Productivity?

Employment-protection changes can reduce productivity where firms face higher firing and adjustment costs.

Supports caution on policies that raise dismissal, scheduling or adjustment costs.

Does Employment Protection Reduce Productivity? (2007)

UK government evidence

Office for National Statistics, 2026

Public sector employment, UK: December 2025

ONS estimates UK public-sector employment at about 6.19 million in December 2025.

Sets the population exposed to public-pay policies.

Public sector employment, UK: December 2025 (2026)

HM Treasury, 2025

Whole of Government Accounts 2023-24

Whole of Government Accounts report GBP 240.5bn staff costs and GBP 263.7bn purchases in 2023-24.

Anchors paybill and procurement exposure.

Whole of Government Accounts 2023-24 (2025)

Sources

Other Green policies

PolicyLens estimates are illustrative and not official costings.