Chancellor George Osborne has announced four further years of public sector pay restraint, in a surprise move as part of today’s summer Budget.

Speaking in the Commons, the chancellor said public sector pay would rise by only 1 per cent a year for the next four years.

This is at odds with what was predicted in last year’s NHS Five Year Forward View. NHS Employers has also recently talked openly about how to engage staff in contract changes as the NHS moves out of pay restraint.

Mr Osborne told MPs: “I am conscious that a huge amount has already been done to increase efficiency across Whitehall with administrative budgets down by over 40 per cent in real terms, but there is still much more we can do.

George Osborne

George Osborne’s pay restraint is at odds with what was predicted in the forward view

“There is a simple trade-off between pay and jobs in many public services. I know there has already been a period of pay restraint but we said last autumn we would need to find commensurate savings in this Parliament so to ensure we have public services we can afford and to protect more jobs. We will continue recent public sector pay awards with a rise of 1 per cent per year for the next four years.”

His comments were followed by an MP shouting out loud that the proposals were “absolutely shocking”.

NHS staff pay was frozen in 2012 and 2013 and since 2014 there have been very limited rises. Last year health secretary Jeremy Hunt prompted industrial action by rejecting the NHS Pay Review Body’s proposal of an across the board 1 per cent rise.

The forward view said the staff contribution to efficiency savings “will not be indefinitely repeatable” and that “as the economy returns to growth, NHS pay will need to stay broadly in line with private sector wages in order to recruit and retain frontline staff”.

There is already a widespread nursing shortage in the UK and problems recruiting to medical posts including in general practice and paediatrics.

The decision could also have consequences for work on extending seven day services in the NHS, because of the related need to change employment terms and conditions for doctors and Agenda for Change staff.

Reacting to news of the pay review, Royal College of Nursing head of policy Howard Catton told HSJ the changes would widen the divide between NHS professionals and political leaders “at a time when we most need them to come together”.

He said better staff engagement in plans to develop new care models was crucial, and said the government’s decision would also “have a significant impact on the recruitment and retention of staff”.

Budget documents published today stated: “Overall, levels of pay in the public sector are now, on average, comparable to those in the private sector. However, public sector workers continue to benefit from a significant premium once employer pension contributions are taken into account.

“In light of this and continued low inflation, the government will therefore fund public sector workforces for a pay award of 1 per cent for 4 years from 2016-17 onwards. This will save approximately £5 billion by 2019-20. The government expects pay awards to be applied in a targeted manner within workforces to support the delivery of public services.”

Budget: Four more years of public sector pay restraint