Rishi Sunak has looked at a possible freeze on benefits and public sector pay to fight the spiralling cost of the coronavirus crisis, it is reported.
He is also said to be trying to persuade Boris Johnson to suspend the “triple lock” on pensions – amid fears it will artificially rise due to the economic turmoil.
The Chancellor has told fellow ministers he is deeply concerned about the long-term damage to the country’s finances, according to the Mail on Sunday.
A Treasury source played down the reports, emphasising that the government previously said there would be no return to austerity.
But Mr Sunak previously made clear there would have to be “restraint” in public sector pay.
The Chancellor wrote to Cabinet ministers in July: “It will be vital that public sector pay awards made during the review take into account the wider economic context. In May 2020, public sector pay was up by 3.7% on the year before, compared to a fall of 1.2% in the private sector.
“For reasons of fairness, we must exercise restraint in future public sector pay awards, ensuring they retain parity with the private sector.”
It comes after the UK borrowed a record £127.9billion between April and June as the UK entered what Mr Sunak called a “very significant” recession.
The Chancellor has previously warned there will be “difficult” decisions ahead, saying: “We need to make sure we have sustainable public finances.”
Now Mr Sunak is said to have discussed scrapping inflation-linked increases to both welfare payments and public sector salaries in future, as a way of clawing back billions of pounds in financial bailouts.
There could be a possible exemption to any public sector pay freeze for NHS workers, according to the Mail on Sunday.
Public sector workers and benefit claimants suffered almost a decade without either above-inflation rises, or any rises at all, as part of Tories’ austerity agenda.
A Treasury source downplayed the reports, and said they would not speculate ahead of any future Budget.
Downing Street has previously failed to categorically rule out a public sector pay freeze.
Quizzed in May, the Prime Minister’s press secretary emphasised Boris Johnson recognises the work of frontline workers and “we’re not going to forget that”.
Pointing out the PM has already promised no return to the days of austerity, he added: “We are determined to support them.”
However, he was unable to categorically rule out either a pay freeze or tax increases – saying a future Budget had not yet been written.
The Chancellor is understood to be examining how to solve an issue with the triple lock that, unchecked, could see a huge rise in pensions in 2022.
The ‘lock’ is a key Tory manifesto pledge which raises pensions by inflation, 2.5% or average earnings – whichever is highest.
However, it takes into account average earnings between May and July the previous year.
Because average earnings fell between 2019 and 2020 due to coronavirus, they could then be seen to rise again between that period and 2021.
That ‘rise’ in earnings could then technically lead to a large rise in pensions in April 2022.
Work and Pensions Secretary Therese Coffey held talks over the issue earlier this year, telling MPs: “This is not about abandoning the triple lock in any way.
“But there are some consequences if average earnings fall during this year that we need to rectify in order to make sure that aspects of the law that is already in place cannot be set aside.”