After a seven year pay squeeze, the Government finally lifted the public sector pay cap for one million public sector workers on Tueday.

One of the first acts of the Coalition Government was to introduce a two-year public sector pay freeze. The then Chancellor – George Osborne – justified the measure saying that while public servants “did not cause the recession… they must share the burden as we pay to clean it up.” Yet the two year pay freeze was followed by a five year pay cap, under which pay rises have been limited to 1%.

This unprecedented seven year pay squeeze has led to significant real terms pay cuts, eroding the value of public sector pay. A teacher on grade M6, is earning £2,800 less in real terms today than the same role in 2011. A police sergeant is earning over £4,100 less.

The Government had planned to continue the pay cap until 2019/20. But their pay cap had become both practically and politically untenable. The decline in the value of public sector pay has contributed to growing workforce crises, with many areas – from schools to the NHS – struggling to recruit and retain the workers that we need. The pay squeeze has led to growing dissatisfaction among public servants, and to escalating pressure from public sector unions. And the pay cap cost the Conservatives dear at last year’s election. The public have grown weary with endless austerity, with a post-election poll showing that a large majority supported lifting the pay cap for NHS workers, police and prison officers, the armed forces and teachers.

Under growing pressure, the Government have been forced to change course. In March, NHS workers were offered a three year pay rise worth 6.5% with additional funding from the Treasury to cover the costs. However, while it will see significant increases for the lowest paid, it is barely a pay rise at all for many workers as it is only just above forecast inflation for the period.

The pay rises announced this week are a significant improvement on what the Government had planned. But they do not go far enough, and this is not the end of the story.

First, while the public sector pay cap has been scrapped, many public servants will face yet another real terms pay cut. Police officers as well as GPs and NHS doctors will get just 2%, below the current rate of inflation of 2.3%. While members of the armed forces and prison officers will receive pay rises just above inflation at 2.9% and 2.75% respectively, in both cases only 2% of the pay rise is ‘consolidated’ – with the remaining amount being a one-off bonus. So their pay points will again increase slower than inflation, further eroding their real term value.

Second, even for those who will see a real terms pay rise, this one year pay offer will do little to reverse the huge real terms pay cuts we have seen over the seven year pay squeeze. Instead of a miserly one-year offer, we need to see consolidated, real terms pay rises in the coming years to reverse the erosion of public sector pay.

Third, while this may seem like an easing of austerity, it is nothing of the sort. Unlike with the NHS, the Treasury will not be fully funding the cost of the pay rises announced on Tuesday. There will be some new funding for schools, but the Department for Education will have to cover the rest. For the police, the prison service, there appears to be no new money to fund the pay rises. This will mean that the pay rises that public servants deserve will come at the expense of the public services that they deliver. Instead of stretching already threadbare departmental budgets, we need to ensure that the pay rises public servants deserve are fully funded.

IPPR have shown that Government can afford to scrap the pay cap. While the headline cost of increasing public sector pay is large, nearly half of the cost returns to Government in the form of higher tax take, lower welfare spending, and the proceeds of growth. And if this was funded through progressive taxation, scrapping the cap could boost economic growth, as public servants are likely to spend their pay rise and boost demand.

So the debate on public sector pay will go on. The miserly one-year pay deals announced on Tuesday are better than what the Government had planned, but they will not reverse the deep cuts we have seen since 2011. Public servants did not cause the global financial crisis, and we should not accept lower public sector pay as the new norm.

Joe Dromey is a Senior Research Fellow at IPPR. The report he co-authored on the public sector pay cap can be found here. He tweets @Joe_Dromey.