Rishi Sunak will give millions of public sector workers pay rises of up to 6.5% but spending cuts may be required in order to fund them.
The Prime Minister accepted the recommendations from pay review bodies, thought to include 6.5% rises for teachers and 6% for junior doctors.
But questions remain over how the increases will be funded, with the Government ruling out extra borrowing to help departments meet the cost.
That could leave the money needing to come from within existing budgets, requiring cuts amounting to billions of pounds.
Formal announcements are expected later on Thursday but The Times reported that as well as the awards for teachers and junior doctors, police and prison officers are expected to receive rises of 6% while armed forces personnel will receive 5-6%.
Chancellor Jeremy Hunt said the Government would take “difficult but responsible” decisions on the nation’s finances and public sector pay in order to manage debt and curb inflation.
The current level of CPI inflation is running at 8.7% and Mr Sunak – who has promised to cut it to around 5.3% by the end of the year – wants to avoid pay increases which could fuel a wage-price spiral.
Mr Hunt told MPs on Thursday that “it is important to deliver on the Prime Minister’s priority to get debt falling and to control borrowing to avoid adding inflationary pressures and risk prolonging higher inflation”.
“That means taking difficult but responsible decisions on the public finances, including public sector pay, because more borrowing is itself inflationary.”
The wider economic challenge facing the Chancellor and Prime Minister was illustrated by official figures showing the UK economy contracted by 0.1% in May.
The 6% award for junior doctors came as medics joined picket lines across England.
Disruption to thousands of planned appointments is expected as junior doctors in England on Thursday started their longest walkout yet in the pay dispute.
The strike started at 7am and ends at the same time on Tuesday.
Meanwhile, teachers from the NASUWT union in England plan to stage continuous action short of strikes starting in September, although its members could still walk out in the autumn if the row continues.
