Millions of public sector workers will be given a pay rise of at least 6%, but government departments have been told to fund the rise from within existing budgets.
Police officers, junior doctors and teachers in England are among those who would benefit after the prime minister, Rishi Sunak, accepted all the recommendations of the independent pay review bodies.
Senior government figures are understood to have been concerned about the effects of the the pay increase on stubbornly high inflation.
Earlier this week, the chancellor, Jeremy Hunt, ruled out providing any extra money funded through borrowing. The move will leave departments facing difficult decisions about how to reallocate spending, with potential knock-on effects for frontline service cuts.
The Treasury had budgeted for pay rises of around 3.5%, meaning between £3bn and £5bn will need to be found across Whitehall to make up the shortfall.
Sunak was similarly strict about not adding more to the national debt when he was asked about the decision on public sector pay earlier this week.
Speaking at the Nato summit in Lithuania on Wednesday, the prime minister said: “Everyone knows the economic context we are in and we need to make sure that government decisions, particularly when it comes to not borrowing more, are made responsibly so we don’t fuel inflation, make it worse or last for longer.”
Teachers will get a rise of 6.5%, while junior doctors and NHS consultants will get 6%. Armed forces personnel, who are banned from striking, will get at least 5%.
The move will trigger intense discussions among some unions about whether to accept the pay rises, or ballot for further strikes.
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