Chancellor Jeremy Hunt has said there is still no decision on how much extra Treasury funding will be needed to meet the cost of public sector pay awards.
Giving evidence to the Commons Treasury Committee, Mr Hunt insisted there would be no cuts to frontline services but suggested there would be “efficiencies and reprioritisations” within government departments.
At the same time, he indicated that the unexpected surge in inflation since the last spending round meant there would be discussions about what additional support they would need.
“When we do settle there will be a negotiation with departments as to how much is borne by additional support from the Treasury and how much is borne by efficiencies and reprioritisations within the departments,” he said.
“As with all pay settlements, departments fund pay settlements with the money they receive in a spending review but in exceptional circumstances there can be a discussion with the Treasury as to any additional help.
“This is a different situation because inflation was so much higher than expected and therefore the pay settlements have ended up being higher than expected.”
Mr Hunt warned there could be “absolutely no room for complacency” on inflation and he denied the Bank of England had overreacted in raising interest rates again this month even though inflation is forecast to fall sharply.
He said: “I don’t believe they are overreacting. I think there is still inflationary pressure in the economy. I am very concerned about it. I think we need to keep our eye on the ball.
“Only a week ago we found that inflation had actually gone up from 10.1% to 10.4%. I think that demonstrates there can be absolutely no room for complacency.”