The Net Exchequer Impact of Increasing Pay for Agenda for Change Staff

Practice area: Economics of Education | Education and Labour Markets
Client: NHS Trade Unions
Published: 18 January, 2021
Keywords: impact assessment quantitative analysis Cost-benefit analysis Education and labour markets Financial Modelling Labour markets

Pay rises are much needed, and long overdue

Corresponding to approximately 4% of employees in England, there are currently just over 1 million nurses, midwives, allied health professionals, and NHS support staff covered by the Agenda for Change (AfC) Pay framework in England. Since 2010-11, pay levels at every single AfC spine point have lagged behind inflation, resulting in a significant decline in total pay in real terms. Most spine points have exhibited a decline in excess of 10%, and total pay on the AfC spine point with the highest incidence of staff (at the top of Band 5) has declined by 15% since 2010-11. This is three times the decline in median earnings experienced by full-time private sector employees across the UK over the same timeframe.

Pay rises are affordable

In the first instance, our intention was to undertake this analysis for AFC staff across the entire United Kingdom. However, as a result of limited data availability, to assess the affordability to the Government of potential pay increases for AfC staff, we estimated the net Exchequer impact associated with an illustrative 10% increase in the total pay bill for AfC staff in England (only) in 2021-22. Despite the focus of this analysis being AFC staff in England, the economic benefits accrued by the Exchequer reflect the enhanced spending benefitting all industries throughout the entire UK economy.

The headline Exchequer cost associated with this 10% pay bill increase was estimated to be £3.40bn. However, offsetting this cost, the aggregate Exchequer benefit resulting from this 10% increase in total AfC pay was estimated to be £2.74bn (or 81% of the initial Exchequer cost), consisting of:

  • £1.60bn in additional tax receipts from AfC staff and their employers – with PAYE taxation, employee National Insurance and employer National Insurance offsetting 22%, 11% and 14% of the initial Exchequer cost, respectively;
  • £0.89bn in wider direct, indirect, and induced tax receipts generated by AfC staff’s increased consumption throughout the entire economy – offsetting a further 26% of the initial Exchequer cost;
  • £0.13bn in cost savings from the improved recruitment and retention of NHS nurses and midwives (equating to 21,790 service years over the period of analysis) – offsetting a further 4% of the initial Exchequer cost; and
  • £0.13bn in cost savings from lower student loan write-offs for nursing students – offsetting a further 4% of the initial Exchequer cost.

The net cost to the Exchequer associated with this illustrative 10% increase in the total bill for AfC staff pay in England was therefore estimated to be £0.66bn. To place this in context, this net Exchequer cost represents approximately 0.075% of total government expenditure in 2019-20 – equivalent to 7½ pence per £100 of government expenditure.


Pay rises support the wider economy

Pay increases for nurses, midwives, allied health professionals and NHS support staff are long overdue, and will result in increased disposable income circulating throughout the economy. This will benefit the many businesses up and down the country relying on a return to normality at the end of the Covid-19 pandemic. Pay increases to approximately 1.1 million public sector employees across the entire United Kingdom will not only address the real erosion of pay and living standards amongst these vital public sector employees, but also provide huge financial support to those businesses and private sector employees in every sector of the economy that the government is currently supporting and most wants to succeed.