UK debt could rise if doctors win wage dispute, IMF suggests

Public sector wage demands go against Jeremy Hunt's campaign to curb soaring inflation. Photo: BEN STUNSALL/AFP

Jeremy Hunt risks causing inflation and rising public debt if he succumbs to striking doctors' and teachers' demands for higher wages, the International Monetary Fund (IMF) has proposed.

The warning comes amid growing pressure on the Chancellor to resolve a spate of public sector strikes that saw junior doctors leave for four days in an attempt to secure a pay rise by 35 percent.

The IMF said a combination of the considered «sluggish growth» in advanced economies and «further increases in government wages and other social spending» will lead to a sharp increase in the country's borrowing.

The fund said the projected increase in UK gross debt from 84.5% of GDP in 2019 before the pandemic to 113.1% of GDP by 2028 means the UK is facing a «steeper upward trajectory» than other advanced economies.< /p>

The IMF said data covering 30 developed countries over three decades showed that large public sector wage increases «could have a significant and long-term impact on private sector wages», affecting wage requirements and fueling inflation especially when unemployment is low and workers can demand more money.

He also warned that history shows that the impact on prices and wages will continue «for many quarters after the jump.»

Public sector wages rose 4.8% in the three months to January through compared to last year, the fastest increase since February 2006.

However, this still lags behind the average growth in the private sector by 7% over the same period. according to the Office for National Statistics (ONS).

Unemployment in the UK remains close to an all-time low of 3.7%, with the Bank of England saying the job market remains tight even as wage demands are gradually starting to cool.

IMF stated that this was an important factor in determining how public sector pay deals affect wages in the economy.

The Fiscal Monitor's latest report says: «The impact of government wage increases on private sector wages and core [inflation] is significantly stronger and longer lasting when the labor market tightens.»

“ The findings show that in times of high inflation and tight labor markets, government wage policy must balance the need to attract and retain highly skilled civil servants with the risk of increased inflationary pressures.”

While fair pay was important to prevent a massive brain drain in the public sector, strong growth risked making inflation more sustainable and keeping interest rates high for longer, the IMF added.

The fund also exposed the extent to which which the government's debt and size will rise due to huge spending on subsidizing electricity bills and a growing welfare bill, including a triple block on government pensions that keeps payouts rising in line with inflation.

UK public finances look significantly stronger gloomy in the latest IMF forecasts compared to its verdict last October.

The global lender of last resort expects a significant increase in government revenue as the UK tax burden rises. and high inflation is pushing more workers towards higher tax bands.

Spending and debt are also projected to rise substantially, calling into question whether Jeremy Hunt can get debt as a share of GDP to fall within five years .

The IMF said that last year government revenues were equal to 38.9% of GDP.

This figure is projected to peak at 39.2 percent next year before dropping back to 35.9 percent in 2027.

This is well above the IMF's estimate in October, when it predicted revenues would rise from 37% in 2022 to a peak of 36.3% before dropping to 35.1%.

Despite the rise in public finances, the IMF said spending and debt will also be much higher.

The organization expects the level of debt to rise every year until it reaches 113.1 percent in 2028.

The previous forecast predicted that it would fall to 68 percent in 2027.

Despite the mixed outlook for UK public finances, the IMF's fiscal director said the organization was impressed by Jeremy Hunt's post-mini-budget medium-term fiscal rules.

«We were actually very impressed with how the medium-term budgeting process works in the UK,» said Vitor Gaspar.

He added: «What do you see, through there will be an increase in public debt for a couple of years, and then stabilization will follow if the forecast of the government and the OBR turns out to be correct.”

The IMF warning came in the form of fresh numbers. showed that US inflation fell to its lowest level in almost two years in March, giving hope that the pressure on US households will soon begin to ease.

Consumer prices rose less than expected in a year to March by 5%, dropping by one percentage point since February.

The dollar immediately fell to a low of almost 0.4% against the pound in response to surprisingly good numbers, which were predicted , will amount to 5.2%.

This comes amid growing international signs that inflation is out of control and poised to fall sharply.