UK Trade Unions Seek £50BN Pay Bump, Posing Fresh Challenges for Bank of England

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The Bank of England will need to proceed with caution in the coming months as the UK's 6 million-strong public workforce seeks out above-inflation pay rises.

It is reported the Trades Union Congress will next month press the government for "pay restoration" to make up for a decade of real-term pay decline.

The FT says the unions' demands for restoring public sector pay to the same level as 2011 in real terms would theoretically require an increase of 21%, or more than £50bn.

The Bank of England cut interest rates in August but said further rate cuts depended on the inflation trajectory, which is closely linked to pay. Economists say the above-inflation pay settlements can increase pressure on domestic inflation, which would prompt the Bank of England to adopt a higher-for-longer interest rate approach.

"Labour has a problem here as its public-sector pay rises look increasingly inflationary," says independent economist and fund adviser Shaun Richards.

Trade unions will be encouraged to pursue fresh demands as the Labour government has already settled disputes with junior doctors and train drivers, offering both inflation-busting pay increases.

Labour's win will significantly boost the unions' influence over government pay policy, owing to the strong historical and existing links between the party and the unions. The ONS estimates 5.95 million people work in the public sector, which is 24K (0.4%) more than in December 2023 and 125K (2.1%) more than in March 2023.

The key question for financial markets is whether public sector pay increases will boost inflation. According to a research piece from Capital Economics, the public sector pay settlements we know of won't materially push the dial on UK inflation, which it expects to return to the Bank of England's 2.0% target in the medium term.

However, this assessment was made prior to the TUC's new demands.

"The big risk is that these pay deals set a benchmark for private sector firms, keeping wage and services inflation elevated and causing the Bank of England to cut interest rates slower and/or by less than we currently anticipate," says Ashley Webb, UK Economist at Capital Economics.

Public sector pay increases are meanwhile having a noticeable effect on the country's finances. The ONS reported the government borrowed more than was expected in July after central government departmental spending increased by £1.3BN to £35.7BN, "as inflation and pay rises increased running costs."

"Public sector pay deals above the previously planned figures, while not surprising, illustrate the extent to which the March Budget underplayed the pressures on the public purse," says Rob Wood, Chief UK Economist at Pantheon Macroeconomics.

Wood expects the government is on track to borrow £16.5BN more than budgeted for in fiscal year 2024/25. "The pressures only build further in the medium term."

A separate news report out today says health, transport and local government unions are said to now be balloting members for strike action after talks with the Government last month broke down without a deal, and "there are also concerns that existing pay offers can heighten demands from other groups."