(Bloomberg) -- Just over two weeks into the job, UK Chancellor of the Exchequer Rachel Reeves is facing growing demands to loosen the Treasury’s purse strings to raise pay for public sector workers and eliminate an unpopular Conservative cap on child benefits.
On Sunday, Reeves hinted she’s prepared to grant above-inflation pay increases to teachers and National Health Service staff after the Times reported that independent pay review bodies had recommended raises of 5.5% for 1.8 million workers in those professions, while the Labour government has budgeted for hikes of only 3%.
“There is a cost to not settling, a cost of further industrial action, and a cost in terms of the challenge we face recruiting, retaining doctors and nurses and teachers,” Reeves said in a BBC interview.
The chancellor has repeatedly said Labour faces the worst fiscal inheritance of any incoming government since World War II, and has pledged to update Parliament by the end of the month on the state of the public finances, while also unveiling a date for her first budget, expected in the autumn. Reeves’s Tory predecessor, Jeremy Hunt, left himself fiscal headroom of just £9 billion ($11.6 billion) at his last budget in March — a razor-thin margin by historic standards that illustrates how little money there is to play with.
“We are going to have to make tough decisions,” Reeves said.
Foremost among them will be whether or not to scrap a Conservative-era policy limiting child tax credits and universal credit to most families’ first two children only. Reeves and Prime Minister Keir Starmer spent the campaign batting away requests to pledge to do so, citing the parlous state of the public finances.
But Labour backbenchers are already pushing for the move — and may face a decision on whether to vote against the government this week, with the Scottish National Party proposing an amendment on the new administration’s legislative program calling for an end to the cap.
On Sunday, one Member of Parliament for the governing party, Zarah Sultana, told the BBC that the two-child limit meant families were “experiencing unnecessary hardships” and that scrapping it could take 300,000 children out of poverty.
“If the Labour party has a moral mission, it has to be to eradicate poverty, especially child poverty,” Sultana said. “We can fund this commitment if we want and it’s a matter of political will.”
Another Labour lawmaker, Rosie Duffield, wrote in the Sunday Times that the policy amounts to “social cleansing.”
“Most who devise these policies will never comprehend poverty, or that it feels like a mental, emotional and physical cage,” she said.
Statistics this month showed that the two-child cap now affects 450,000 families — a number that’s set to grow into the 2030s, as the limit applies to children born after April 2017. The Resolution Foundation estimates scrapping the policy would cost £2.5 billion this tax year, rising to £3.6 billion a year later.
Reeves told the BBC she’s not willing to make unfunded commitments.
“If we’re not able to say where the money is going to come from, we can’t promise to do it,” she said. “That’s true when it comes to the two-child limit, and anything else.”
The decision on public sector pay is another demand on the Treasury’s limited resources. The pay review bodies for teachers and NHS staff are just two of eight that report to the government, with others covering areas such as the armed forces, police, and prison officers.
If the 5.5% rise was extended throughout the public sector, the government would need to find an extra £10 billion, according to Institute for Fiscal Studies Director Paul Johnson. “It can only come from higher borrowing than they’re planning, higher taxes than they’re planning, or cuts in spending elsewhere,” Johnson told BBC radio.
Reeves said the government is analyzing the pay recommendations and will make an announcement later this month. A higher-than-expected pay increase would challenge her election promises to stick to UK fiscal rules on borrowing and avoid tax hikes.
Labour swept to power in the July 4 election promising a decade of “national renewal” after 14 years of Conservative-led governments. But it’s relying on stimulating growth to deliver the tax revenues needed to boost spending, and last week unveiled a legislative program that included loosening planning rules, ending a de facto ban on onshore wind and creating a new National Wealth Fund to leverage private investment.
On Monday, Starmer and Education Secretary Bridget Phillipson are set to announce the creation of a new body — Skills England, to identify skills gaps and help employers access the training needed by their workers, according to a statement from the Department for Education.
Meanwhile at the weekend, the Treasury announced a review of the pensions industry, as part of plans to channel more cash into UK startups and infrastructure projects. The chancellor and Emma Reynolds, the new pensions minister, will chair a meeting with pensions industry executives Monday to discuss the review.
Reeves said there would soon be £800 billion of pensions savings in defined-contribution policies, and that working people were “being let down by the pensions industry” due to low returns.
“That money frankly is not working well enough for savers, but it’s also not working well enough for our economy,” Reeves said. Unlocking just 1% of it to invest in “fast growing British companies” would “help finance growth and prosperity and wealth creation here in Britain,” she said.
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