Chancellor Rachel Reeves is headed on a collision course with public sector unions who have hit out at proposals to raise pay for more than a million public sector workers by 2.8 per cent next year.
Inflation is predicted to average 2.5 per cent this year and 2.6 per cent next year, according to forecasts from the Office for Budget Responsibility.
The British Medical Association said the Government showed a "poor grasp" of unresolved issues from two years of industrial action, and the Royal College of Nursing called the pay recommendation "deeply offensive".
The National Education Union's chief said teachers were "putting the Government on notice" that the proposed increase "won't do".
The pay recommendations came after Ms Reeves called for every Government department to cut costs by 5%, as she started work on a sweeping multi-year spending review to be published in 2025.
Independent pay review bodies will consider the proposals for pay rises for teachers, NHS workers and senior civil servants.
The Department of Health said it viewed 2.8% as a "reasonable amount" to set aside, in its recommendations to the NHS Pay Review Body and the Doctors' and Dentists' Remuneration Board remit groups.
A 2.8% pay rise for teachers in 2025/26 would "maintain the competitiveness of teachers' pay despite the challenging financial backdrop the Government is facing", the Department for Education said.
The Cabinet Office also suggested pay increases for senior civil servants should be kept to no more than 2.8%.
The Royal College of Nursing general secretary and chief executive hinted at more potential strikes as she called for "open direct talks now" to avoid "further escalation to disputes and ballots".
Professor Nicola Ranger said: "The Government has today told nursing staff they are worth as little as £2 extra a day, less than the price of a coffee.
"Nursing is in crisis - there are fewer joining and too many experienced professionals leaving. This is deeply offensive to nursing staff, detrimental to their patients and contradictory to hopes of rebuilding the NHS.
"The public understands the value of nursing and they know that meaningful reform of the NHS requires addressing the crisis in nursing.
"We pulled out of the Pay Review Body process, alongside other unions, because it is not the route to address the current crisis.
"That has been demonstrated today.”
Professor Philip Banfield, chairman of the British Medical Association's council, urged the sector's pay review body to "show it is now truly independent".
"For this Government to give evidence to the doctors' and dentists' pay review body (DDRB) believing a 2.8% pay rise is enough, indicates a poor grasp of the unresolved issues from two years of industrial action," he said.
He said the proposal is far below the current rate of inflation and that the Government was "under no illusion" when doctors accepted pay offers in the summer that there was a "very real risk of further industrial action" if "pay erosion" was not addressed in future pay rounds.
The NEU's general secretary, Daniel Kebede, also hit out at the proposal, saying teachers' pay had been cut by more than one-fifth in real terms since 2010.
In a hint that there could be a return to industrial action he added: "NEU members fought to win the pay increases of 2023 and 2024.
"We are putting the Government on notice. Our members care deeply about education and feel the depth of the crisis. This won't do."
