Ending the public sector pay cap could cost nearly £10bn over the next five years, warns think tank.

A new study published by the Resolution Foundation has warned the public sector workforce faces two ‘austerity crunches’ – shrinking pay and job losses.

Entitled Living with Austerity, the report said by 2020 the average pay of a public sector worker will be at 2005 levels, while the number of central and local government workers will fall below five million for the first time this century.

Despite these findings, the think tank - which has published its reports in the midst of a national debate over austerity - cautioned that is would be impossible to end the public sector pay cap ‘without causing fiscal pressures’.

It revealed allowing public sector pay to rise in line with the private sector from next year onwards would cost £9.7bn by 2021-22. It also found allowing the workforce to grow in line with the population would cost a further £11.5bn over the same period.

The think tank said the cost of unfreezing benefits would be lower than abandoning the pay cap, even though the benefit freeze affects more people.

Allowing working age benefits to rise in line with inflation from next April would cost £3.6bn by 2021-22, while reversing the cuts to Work Allowances in Universal Credit would cost around £3.2bn, it reported.

Finally, allowing departmental spending (including public sector pay) to rise in line with GDP growth after the end of the current spending review would cost £12.3bn by 2021-22.

However, this would leave further spending cuts planned for the next two years in place. Reversing these cuts would cost a further £11bn.

‘The shock election result has led politicians from all parties to question whether the public have grown tired of austerity,’ said Matt Whittaker, chief economist at the Resolution Foundation.

‘Seven years on from then Chancellor Osborne’s first emergency Budget, it’s no surprise that squeeze fatigue has set in.

‘But recognising that fatigue is very different to doing something about it.

‘If we want a serious discussion on ending austerity, we need to get serious about prioritising what spending we really want to see rise and how we want to pay for it – and that means tax rises for most of us.’

Mr Whittaker said the Government could begin to tackle the deficit by ‘cancelling’ unneeded corporation tax cuts, but said the Government would raise more money by freezing tax thresholds on income tax and National Insurance

This would bring in a further £12.5bn by the end of the Parliament, he said.