Cabinet ministers have been warned they will no longer be able to dip into Treasury reserves to fund public sector pay rises in a bid to ease mounting pressure on government finances.
Chief Secretary to the Treasury, James Murray, has written to ministers to remind them to keep a tight control of public spending and said access to reserves will only be granted on an exceptional basis.
Any extra help paid to departments will also have to be paid back to the Treasury, as part of preparations for next month’s highly anticipated Budget.
Mr Murray said: “To keep tight control on public spending, departments must take responsibility for managing pressures and making choices about priorities without relying on the reserve.
“We must deliver the efficiency plans set out in June – reducing administrative budgets, including those of arms-length bodies and agencies – and deliver comprehensive digital transformation.”
The chancellor Rachel Reeves is under growing pressure after gloomy economic figures led to predictions that she will have to raise taxes or break her own fiscal rules to plug a £50bn gap in Labour’s sums.
But the crackdown comes just months after Labour offered above-inflation pay rises to most public sector workers shortly after entering power.
Labour sought to bring an end to a series of strikes that plagued the last Tory government with pay rises above-inflation rises of 5pc to 6pc for most public sector workers.
While the strategy worked in the short-term, only this week first-year doctors in England overwhelmingly voted in favour of fresh strike action, citing concerns over job security and significant pay erosion.
If cabinet ministers do try to use the reserve to plug funding gaps, they will have to demonstrate to the Treasury how they have exhausted all options to find the money through savings and cuts.
And any money departments do get will have to be repaid over successive years.
The details of the new system came after Ms Reeves warned ministers they would be limited in seeking help from Treasury funding if they bust their spending plans, when she spoke at the first meeting of the cabinet since Sir Keir’s reshuffle last month.
She is constrained by Labour’s manifesto commitment not to increase income tax, national insurance and VAT – ruling out three of the biggest potential revenue-raisers for the Treasury.
A revolt by Labour MPs over planned welfare reforms has also put a £5 billion hole in her spending plans, while the government was also forced to climb down over its planned restrictions on eligibility for winter fuel payments.
