Rachel Reeves has warned public sector workers she will have to make “difficult choices” on pay because of the state of the nation’s finances.
The Chancellor said Labour would have to deal with the “mess” left by the Conservative administrations over the last 14 years.
A series of public sector pay review bodies are expected to report to the new Cabinet ministers within weeks.
Granting inflation-busting rises would put pressure on the public finances, but unions may revolt over increases which fail to recognise the cost-of-living pressures in recent years.
Pay awards were an average of 5% in 2022 and between 5% and 7% in 2023.
Ms Reeves told a press conference at the Treasury she had asked officials to provide an update on the state of the nation’s finances she has inherited.
“I’m under no illusions about the scale of the inheritance. I’ve been clear about that in my speech today. I’ve been clear about that these last few weeks,” she said.
It would mean “difficult decisions for this incoming Labour Government because of the mess left by our predecessors”.
The Chancellor presented an assessment which showed that if the economy had grown at the same rate as the average among the OECD group of developed nations it would be £140 billion bigger, with £58 billion more in tax revenue for public services.