As you can imagine, Chancellor Jeremy Hunt is under extreme pressure to put an end to the recent public sector strike, especially after junior doctors walked off the job for four days this month. However, if Hunt meets the demands of these striking doctors and teachers and gives them the higher pay they have been asking for, inflation and public debt could rise, according to the International Monetary Fund (IMF).
This does not constitute advice and advice should be sought in all instances before acting on it.
Number of factors in play
Of course, this is not the only issue facing the nation at the moment. The IMF pointed to a combination of “lacklustre growth” across advanced economies and the “further increases in public wages and other social spending” that are being considered that will take the country’s borrowing on a much higher path than previously hoped. They also stated that the projected increase in gross UK debt from 84.5pc of GDP in 2019 pre-pandemic to 113.1pc of GDP by 2028 results in a “steeper upward trajectory” compared to other advanced economies.
Historical precedent
So why is the IMF warning that the current situation facing the chancellor could lead to an even bigger crisis? After reviewing the data from 30 developed economies over the last three decades, they learned that big public sector pay raises influences the private sector as well. These increased public wages have an effect on private ones, especially when unemployment is low and it’s an employees’ market. This, in turn, drives up inflation and affects prices and wages for multiple quarters after the initial spike.
In the latest Fiscal Monitor report, the IMF cautioned,
“The impacts of government wage hikes on private wages and core [inflation] are significantly larger and longer-lasting when labour markets are tighter.”
“The findings imply that during periods of high inflation and tight labour markets, public wage policy should balance the need to attract and retain high-quality civil servants against the risk of fomenting inflationary pressures.”
Keep an eye out for the result
Since the outcome of these negotiations will heavily impact the nation’s economy — negatively, according to the IMF — be sure to stay up to date about any news. To discuss how the result will impact your finances, get in touch with your trusted Dental & Medical Financial Services adviser today.