Rachel Reeves, the Chancellor, is facing further pressure from millions of public sector workers following recommendations that they should be offered a 4 per cent pay rise.
The proposal has been put forward by the independent pay review body, which represents 514,000 teachers, for the rise to be close to 4 per cent.
Meanwhile, the body acting on behalf of the 1.38 million NHS workers has put forward a 3 per cent rise.
It was reported in The Times that the increases were higher than the 2.8 per cent rise that the Government had planned for and will have an effect on the public finances.
Efficiency savings are expected to be suggested to help schools and hospitals to fund the pay rises. Police officers, prison officers and soldiers are also expected to be offered a salary increase.
It comes as the Government borrowed almost £15 billion more because of the rising costs of benefit spending along with public sector pay rises last year.
The Treasury has previously warned ministers that if pay review bodies recommended pay increases, the money would have to come from the budgets already in place.
It is expected that the recommendations put forward by the pay review bodies will be accepted in full by the Government, but it will not be enough to stave off industrial action.
An NHS source said: “This will go down really badly. “These are people who haven’t had a lot given to them in recent years and we know that nurses are gingering up for some kind of industrial action, unions are very upset and it is going to be unrest all over again.”
Ben Zaranko, the associate director at the Institute for Fiscal Studies, said: “Paying staff appropriately will be critical if the Government is to deliver its promised improvements to hospitals, schools, prisons and the police.”
However, he added: “If pay recommendations run ahead of what public service leaders have set aside, and no additional funding is forthcoming, that will force ruthless prioritisation and tough choices elsewhere.”
A spokesman for the Treasury said that the Government was considering the recommendations and would respond in due course.
He added: “Last year, this Government accepted the independent pay review bodies’ recommendations in full, providing the first meaningful real-terms pay rises for years.”
Strikes have been threatened by the NASUWT teaching union unless the pay award was funded by the Government, as opposed to being created from budget cuts.
Meanwhile, the National Education Union, England’s largest teaching union, has pledged to hold a formal ballot if the offer is “unacceptable” or no extra funding is offered.
Further strikes could also be staged by NHS workers leading to more disruption to hospital services and delayed care for patients.
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