Rachel Reeves signals she will give inflation-busting pay hikes for public sector workers

Rachel Reeves has hinted at inflation-busting pay rises for public sector workers , highlighting the cost of industrial action from “not settling”.

The chancellor has promised that “ people won’t have to wait long ” for a decision after reports that independent pay review bodies have recommended a 5.5 per cent rise for teachers and around 1.3 million NHS staff.

“ There is a cost to not settling , a cost of further industrial action, and a cost in terms of the challenge we face recruiting,” she told the BBC’s Sunday With Laura Kuenssberg programme.

Ms Reeves added: “ We will do it in a proper way and make sure the sums add up.”

She said an announcement will be made by the end of July, alongside the publication of a Treasury review into the state of public finances. Schools and hospitals are unlikely to be able to finance a 5.5 per cent pay rise, more than double the current rate of inflation, from their existing budgets.

Paul Johnson, director of the influential Institute for Fiscal Studies, suggested the pay rises could cost an extra £3bn at least for schools and the NHS alone.

He told the BBC: “In terms of the cost, there isn’t a specific number that is budgeted for schools. It’s probably 1 or 2 per cent, it’s certainly nothing like 5.5 per cent, so we’d certainly be looking at at least an additional £1bn on schools’ costs relative to what they’re currently expecting.

“And a number at least double that across the NHS if the proposals for the NHS are similar, which it appears that they might be.”

Ms Reeves accused the Conservative government of having “run away” from making tough decisions on pay, adding that the recommendations were on former education secretary Gillian Keegan’s desk before the election was called.

“She didn’t do anything about it. She didn’t publish it, she didn’t say how she was going to respond to it,” the chancellor said.

She added: “They called an election, they didn’t make the tough decisions, they ran away from them and it’s now up to us to fix it and to pick up the pieces."

However, shadow chancellor Jeremy Hunt denied that he had ducked difficult choices on public sector pay.

He told Laura Kuenssberg: “You have interviewed me on many occasions over the years and you can criticise me for many things, but not taking tough and difficult decisions is one thing I don’t think people would level at me.”

A higher-than-expected pay rise could pose a significant challenge for Rachel Reeves’s first budget, likely to come in the autumn, after promising to control borrowing and ruling out a string of tax rises during the election campaign.

But failing to meet the recommendations of the pay review bodies, expected to be published this month, would set up a clash with trade unions representing the six million public sector workers.

Daniel Kebede, general secretary of the National Education Union, has warned that ignoring the recommendations of pay review bodies could result in strike action.

Noting that the new education secretary, Bridget Phillipson, had “worked really hard” to improve relations with the teaching profession, he said: “It would be highly problematic for the Treasury to then intervene and then not implement a 5.5 per cent pay award.

“We absolutely would want to avoid strike action, but that would almost seem inevitable if the Treasury were to make such an intervention.”

Also on Sunday With Laura Kuenssberg , Ms Reeves said the government would carry out a review of pensions to help stimulate growth by unlocking cash in schemes.

“People who make sacrifices and save every month to put something aside for their retirement, they deserve better than the returns they’re getting on those savings today,” she said, adding there was an “urgency” from the government to unlock investment.