Proposals to raise NHS wages by just 2 per cent will lead to political strife and sustained 'hard bargaining', according to health economists.
The Department of Health's submission to the pay review body warns that a higher pay increase in 2008-09 would put service improvements 'in jeopardy' and could lead to job losses.
It highlights the final salary pensions enjoyed by NHS staff and states that staff morale is 'generally not related to levels of pay', despite the anger resulting from this year's staged 2.5 per cent award.
However, the government faces a tough battle with trade unions, which have warned that members will not stomach another below-inflation pay award.
York University professor of health economics Alan Maynard said: 'The government is in a very difficult position.
'Two per cent is realistic for employers given the financial constraints next year, but it is going to be very politically difficult.'
Imperial College London professor of health policy Nick Bosanquet said: 'A 2 per cent wage rise is slower than the private sector and retail price index growth. But it reflects the cycle of large increases followed by a long period where it's static, meaning we get the worst of both worlds - public disquiet over the large increases and staff disquiet over the small ones.'
NHS Employers raised concerns over 'a deteriorating relationship with staff representative bodies and trade unions' in its evidence to the pay review body.
Its submission, based on a survey of managers, backs a 2 per cent limit but urges against phasing the increase. The practice had led to non-recurrent 'fixes' being used as a 'sticking plaster over growing recurrent problems', it said.
Primary care trusts will find the financial situation next year particularly challenging, NHS Employers said, because of rising care bills, local government cutbacks and rising drugs costs.
Acute trusts are hit with a 'double whammy' of efficiency targets - those built into the payment by results tariff and internal savings needed to balance ongoing commitments. They are also most at risk from equal pay claims and reducing secondary care activity, and cuts in training budgets. Rising fuel and energy prices will affect mental health and ambulance trusts.
NHS Employers deputy director Alastair Henderson said: 'While trusts are committed to rewarding their staff for the contribution they make, they need to ensure that they don't tip the balance which could result in savings having to be made elsewhere.'
Managers were unanimous in their belief that medical and non-medical staff should get the same award.
But the British Medical Association argued that doctors should get 3.6-4.3 per cent given their 'enormous contribution' in lowering waiting times and providing high-quality care.