Public sector workers now earn about 6 per cent more than their private sector counterparts – three times the gap seen at the start of this year – according to new analysis by the Decision Foundation.
The think tank’s research suggests that a series of generous pay settlements under Sir Keir Starmer’s government have widened the gap between the two sectors.
The revelations are likely to raise concerns that Whitehall is prioritizing union demands at the expense of taxpayers, who faced a £40bn tax raid in Rachel Reeves’ first budget. Next year’s pay negotiations have already become contentious, with teachers and medical professionals threatening industrial action over the Finance Minister’s proposed above-inflation pay rise, which they consider insufficient.
Data shared by the Resolution Foundation shows that the monthly wage in the public sector – in the fields of health, education and public administration – recently exceeded £2,640, compared to around £2,500 in the private sector. The shift was largely driven by settlement deals for key groups such as junior doctors, who accepted a 22 per cent rise over two years, training staff, who received a 14 per cent deal and a moratorium on some workplace reforms.
Mike Brewer, interim chairman of the Decision Foundation, said: “Private sector wages have gradually risen over the past year, but the real change in the public sector came in October, when NHS pay settlements came into force.”
However, critics warn that the generous settlements risk fueling inflation, undermining the Bank of England’s plans to cut the cost of living, and draining additional revenue from Ms Reeves’ tax rises without producing the expected investment in public services. The bank recently warned that continued uncertainty over wages threatens to delay potential interest rate cuts, while the government has refused to rule out further tax rises.
Central government staff costs jumped to £18.3bn in November – an increase of £2.4bn compared to last year, official data shows. Ministers are under renewed pressure as departments consider a 2.8 per cent pay rise next year, slightly higher than the expected inflation rate of 2.6 per cent but still below union expectations. The British Medical Association described the proposals as a “very real risk of further industrial action”, while teaching unions and nursing bodies issued similar warnings.
Any higher wage offers would increase pressure on the public purse. The Office for Budget Responsibility expects total government spending to increase by £239 billion by 2030, exceeding £1.5 trillion for the first time. Britain’s economic recovery remains fragile, with flat growth in the third quarter of 2024 and a 0.1 percent GDP contraction in October, putting the country closer to recession.
The Decision Foundation’s findings also show that top earners are set to take home £356 per person next year, the equivalent of a 0.6 per cent fall in living standards. The richest tenth of households will bear the brunt of Ms Reeves’ record £40bn tax rise, while those on low to middle income will see small gains, largely due to expanded public services and a rise in the minimum wage.
Although Labour’s plan aims to address chronically underfunded public services, the tax raid is expected to drive down private sector wages, especially after employers’ national insurance contributions rose from 13.8 per cent to 15 per cent. Private sector employers now bear this burden, while the public sector is exempt from this burden.
“People may not feel better off in purely financial terms, but the government hopes they will if public services become less dysfunctional,” Mr Brewer noted.
Experts warn that the weak economic outlook, coupled with rising public wage demands, could lead to another round of tax measures. Carl Emerson of the Institute for Fiscal Studies (IFS) noted that with little room for growth, the government may have to abandon or adjust its fiscal targets.
Despite these doubts, a Treasury spokesman insisted that the government had “cleared the dust” and must now focus on implementing our “plan for change”, which hinges on attracting investment and boosting productivity. On the other hand, the widening pay gap between public and private sector employees – against the backdrop of rising union tensions – highlights the challenges facing the British economy under Labour’s leadership.