Cancelling fuel duty freeze could pay for public sector pay rise, says IFS

theguardian.com:

Jeremy Hunt could offer striking public sector workers a bigger pay rise before his budget next month by cancelling plans for a fuel duty freeze costing £6bn, according to a leading tax and spending watchdog.

With waves of fresh strike action planned across the public sector next month, the director of Institute for Fiscal Studies (IFS), Paul Johnson, said the chancellor faced a “straight choice” between subsidising car driving and helping public sector workers cope with the cost of living crisis.

He said concerns that a pay rise averaging 5.5% – adding £5bn to the bill for this year’s settlement – would spark a fresh round of inflation were exaggerated because the effect would be “extremely small” compared with the size of the overall economy.

“If as we expect we have yet another freeze on fuel duties, that is a £6bn in-year tax cut and indeed an injection of money into the economy. And there is a straight choice there, £6bn goes quite a long way, if you are spending that on public sector pay rather than cutting fuel duty,” he said.

“Supposing the Treasury came up with an extra 2% or 3% for public sector workers, we are talking about a few billions of pounds from a two and a bit trillion pound economy. The likelihood of inflation making a big impact on that is extremely small,” he added.

Hunt has fended off calls for the government to offer public servants a bigger pay rise by arguing it would cost £28bn and push up inflation, forcing the Bank of England to raise interest rates further.

In its look-ahead to the budget, the IFS said it disputed the Treasury’s figures, arguing the cost of an increase from the current 3.5% average offer to 5.5% could be even less than £5bn. It said between 30% and 40% of the pay rise would be