PolicyLens

Green - Labour market

Index public-sector pay to inflation

Require annual public-sector pay awards to match CPI inflation as a minimum from 2027-28.

Last updated: May 2026.

Read the policy-specific methodology note

Paybill baseline

The model uses a GBP 285bn 2027-28 public staff-cost base, built from WGA staff costs and uprated from 2023-24.

  • ONS counts 6.19m public-sector employees.
  • WGA staff costs were GBP 240.5bn.
  • Central case assumes a 1pp inflation top-up.

Core trade-offs

Workers are protected from real-pay cuts, but departments carry inflation risk. If unfunded, the policy means fewer vacancies, weaker services or less capital spending.

  • Public workers gain real-pay insurance.
  • Taxpayers or services bear the cost.
  • No productivity gain is automatic.

Illustrative fiscal impact

+GBP 0.0bn to +GBP 7.0bn. Central estimate: +GBP 2.2bn.

  • 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: No direct job creation; unfunded awards squeeze vacancy budgets and staffing plans.
  • Wages: Public workers gain real-pay protection when awards would otherwise lag CPI.
  • Prices: Little direct CPI effect, but procurement and tax pressure may rise.
  • GDP / productivity: Likely neutral to negative unless retention gains exceed spending cuts.

Assessment

A hard inflation floor is a pay-insurance policy, not an efficiency reform. It protects public workers, but shifts inflation volatility to departments or taxpayers. The fiscal risk is highest when inflation surprises after spending plans are fixed.

Confidence: Medium-low. Paybill arithmetic is clear; the weak point is how departments absorb unfunded awards.

Main risks

  • Budget crowding: Departments may absorb higher pay through vacancies, service cuts or delayed investment.
  • Indexation lock-in: Repeated CPI floors can weaken pay discipline and spread inflation shocks.
  • Poor targeting: High-shortage and low-shortage occupations receive the same protection.

Safeguards

  • Fund above-plan awards transparently.
  • Keep pay review bodies occupation-specific.
  • Publish headcount and service-quality trade-offs.

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.