Sir Keir Starmer is set to give teachers and nurses above-inflation pay rises, despite warnings this may have to be financed by extra taxes or borrowing.

The independent pay review bodies, which represent 514,000 teachers and 1.36 million NHS workers, have both recommended pay rises of around 5.5 per cent.

According to the Institute for Fiscal Studies, Labour has budgeted for a pay rise of just 3%, and the extra money “can only come” from higher borrowing, higher taxes or spending cuts.

However, if the prime minister refuses to offer the 5.5 percent pay rise, or refuses to fully fund it, he will clash with union leaders who are threatening strike action if they are offered less.

Sir Keir, who has vowed to end the chaos of the Conservative government, does not want to risk a conflict with the unions that could lead to large-scale strikes in key public services.

Sir Keir is believed to be open to an above-inflation pay rise for public sector workers, but Downing Street sources said he is not prepared to give in to union demands at any cost.

Economists said a 5.5 percent pay deal for teachers and nurses alone would cost the Treasury an extra £3.5 billion. But if the 5.5 percent figure were replicated across the public sector, it could cost an extra £10 billion.

‘There is no fourth option’

IFS chief executive Paul Johnson said implementation of the wage recommendations “can only come through higher borrowing than planned, higher taxes than planned or cuts elsewhere. There is no fourth option.”

The government may have to break its election promises and find additional money through tax increases or more borrowing, after just two weeks.

The Labour leader repeatedly said during the election campaign that all his plans would be “fully costed” and that he would not raise taxes for working people beyond those set out in his manifesto.

Rachel Reeves, the finance minister, has said she will only borrow money to invest as part of her new budget rules, and has pledged “ironclad” discipline to balance the books.

It is unclear whether Sir Keir will accept the full 5.5 per cent recommended by the independent pay review body, or whether he and Ms Reeves will agree to a figure that is lower but still above inflation, which currently stands at two per cent.

Labour has already rejected demands from some unions for much bigger pay rises. Wes Streeting, the health secretary, said during the election campaign that he “cannot afford” the 35 percent pay rise over several years that junior doctors are demanding.

The independent pay bodies recommended the 5.5 per cent pay rise for NHS workers and teachers because the figure is in line with private sector pay rises. The average weekly pay of private sector workers rose by 5.5 per cent in the three months to May compared with 2023, data from the Commons Library shows.

‘Finances are bad’

When asked at the NATO summit in Washington last week whether he would give what unions demanding above-inflation pay rises wanted, Sir Keir said: “No, is the answer to the last part of that question.

“Of course there are some wage agreements that have to be made annually, but the finances are in a very bad state. I think that is clear.

“And that’s why we were careful about what we said leading up to the election, and we will be careful about what we say after the election is over.”

Downing Street sources insisted he was referring to his refusal to write unions a blank cheque when it came to their pay demands.

Education and health union leaders have both pushed for above-inflation pay rises, arguing in submissions to the pay review body that this would help recruitment and retention.

Both the education and healthcare unions plan to present any government offer of a pay rise to their members. If this offer is rejected, they will consider organizing a strike action.

Daniel Kebede, the general secretary of the National Education Union, told the Sunday Telegraph: “If the Treasury intervenes and gives a pay rise of less than 5.5 per cent, it would be very provocative and a strike would be inevitable.”

He said any salary offer would be used as a basis for negotiations on a much larger multi-year settlement, explaining: “Teachers have lost 25 per cent of their salary since 2010 and we don’t expect this to happen all at once, but over the course of the parliament.”

Mr Kebede added: “This government came to power with a promise to repair the relationship with the profession and promise a new deal for working people.

“The responsibility is on them to avoid (strike) action. The way to do that is to make sure that the pay is 5.5 percent and that it is fully implemented with the right funding. And then to promise to work with the union to restore the wage offer, the direction of parliament.”

Strike action on the agenda

School principals fear that even if the Ministry of Finance approves the 5.5 percent pay rise, they will choose not to fully fund it, meaning schools will have to make up the shortfall through their existing budgets.

Pepe Di’Iasio, the general secretary of the Association of School and College Leaders, said it would be a “real problem” if the pay rise was not fully covered by the Treasury, warning that this could lead to classroom budgets being cut to “make up for the shortfall”.

Meanwhile, a health union source said strikes were always a last resort but they could be called “if members rejected any offer”.

He reiterated warnings about the need for any pay rise to be fully funded, saying: “The NHS would find it very difficult to find savings in areas because it is running at full capacity and has been for some time. We would immediately turn that back to the government and say that not fully funding it is not an option.”

A government spokesman said: “We value the vital contribution that our nearly six million public sector workers make to our country. The Pay Review process is ongoing and no final decisions have been made. We will provide an update in due course; however, we are under no illusions about the scale of the tax legacy we face.”

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