In its latest Earning Outlook published today, the think-tank referenced the forecasts released last week by the Office for Budget Responsibility, which indicated overall pay growth could turn briefly negative as the year progresses.
But today’s analysis, which is supported by the Nuffield Foundation, suggests the decline has already started in the public sector and is likely to continue until at least 2019.
The report highlights that the relatively strong performance in public sector pay over the last two years was mainly a consequence of low interest rates, which offset government-enforced pay caps. Now that inflation is beginning to turn upwards, the analysis predicts this could show through as a relative drop in public sector pay for the three months to February.
In his spring Budget, chancellor Philip Hammond confirmed the 1% pay cap for public sector wages would be extended for a further three years, until the end of the current Parliament. By this point, pay is forecast to have fallen below 2004-05 levels.
If current pay trends remain the same, average pay in the sector would be around £1,700 lower in 2019-20 than its peak in 2009-10. However, the think-tank noted that public sector workers in the very lowest wage bracket would be protected to some extent by the “large and welcome planned increases in the National Living Wage”.
One of the hardest hit sectors in terms of pay growth, said the report, has been health and social care. Pay in this sector could fall by 6% by 2019-20.
The think-tank observed that this could make it difficult to recruit new workers and provide sufficient care for an ageing population, notwithstanding Hammond’s announcement at the budget of an extra £2bn for the social care sector.
Also, pay in public sector education for 2016 was lower than in 2003, and is expected to fall by 3% in the next three years.
Adam Corlett, economic analyst at the Resolution Foundation, said that rising inflation was applying the breaks to public sector pay growth, the outlook for which was “particularly weak”.
“Although public sector pay restraint is important to the government’s deficit reduction plans, falling real pay is likely to see increasing recruitment strains,” he said.
He advised the government to start planning now for to manage these strains, “alongside any wider changes to policies like migration that will also have an impact.”
This sentiment was echoed by Unison, which said school staff, nurses and council workers were struggling to make ends meet.
General secretary Dave Prentis said: “After years of harsh pay restraint, those delivering our public services are facing yet more financial hardship.
“If ministers don’t reverse their damaging policy of 0 or 1% rises it will be harder to recruit new staff or keep those with experience.”