Labour has dismissed as “fiction” a think tank report claiming its fair pay agreements in social care could cost taxpayers £4.2 billion a year.

As part of its new deal for working people, the party plans to empower adult social care professionals and trade unions that represent them to negotiate a sector-wide agreement for pay, terms and conditions.

In a report that also prompted a backlash from unions, the centre-right Policy Exchange think tank said the total cost to the care industry of this wage rise in 2023-4 would have been at least £9.9 billion per year.

The calculation is based on the assumption the sector-wide minimum wage was set at £15 per hour.

Some £4.2 billion of those costs would fall on the taxpayer, funded via local authorities, according to Policy Exchange.

The study also assumes Labour would follow New Zealand’s model, where a recently-legislated sectoral collective bargaining system has now been scrapped.

The think tank argues Labour’s policy would damage productivity growth and fuel inflation, with head of the policy programme for prosperity Roger Bootle calling it an “act of economic self-harm”.

However, the party denied it is proposing following New Zealand’s model.

Labour’s fair pay agreement would set a framework for a negotiation, with parameters set by various parties who would agree on terms and conditions.

A party spokesperson said: “These claims are based on fiction and don’t reflect Labour policy. The real risk to people’s pockets is the £46 billion unfunded Conservative pledge to abolish national insurance.

“After 14 years of Tory failure to fix the broken adult social care sector, Labour’s New Deal for Working People will lay the groundwork for better conditions that end the race to the bottom in care and offer the dignity and respect these crucial workers deserve.”

Labour believes the policy would make a big difference to low-paid workers and tackle the recruitment and retention crisis in the care sector.

TUC general secretary Paul Nowak said: “We have an ageing population and an acute staffing crisis in social care – with over 150,000 vacancies.

“This is having a huge impact on the quality of care provided to service users and is reducing capacity in the NHS.

“The international evidence is clear. Collective bargaining creates the better jobs, pay and conditions that workers, public services and our economy needs.

“Wheeling out these lazy and discredited arguments will do nothing to fix our broken social care system.”

Natalie Grayson, GMB national officer, said: “Care workers are some of the hardest-working yet underpaid and undervalued members of society.

“It takes a special kind of twisted mind to claim giving them a pay rise will somehow damage the economy.

“Not only are these dodgy figures economically unsound, they are morally bankrupt.

“Fair pay agreements will give care workers a proper quality of life and force care companies to invest in workers, rather than siphoning off profits to tax havens.”