Rachel Reeves talks about plans of imminent above-inflation pay deals for teachers and nurses

Rachel Reeves signalled today she is prepared to give thousands of teachers, NHS staff and police officers above-inflation pay rises.

The new Labour chancellor warned there was 'a cost' to not giving public sector workers pay increases in terms of strikes and recruitment problems.

It came after reports suggested independent pay review bodies have recommended a 5.5 per cent rise for teachers and around 1.3 million NHS staff. This pay rise is in line with that given to the private sector.

Inflation currently sits at 2 per cent, although it was at a 40-year high of 11.1 per cent in October 2022.

Speaking to the BBC Ms Reeves said the Government will 'make sure the sums add up'.

And she claims the deal for teachers was on the desk of Tory education secretary Gillian Keegan before the election but she did nothing with it.

The Chancellor has accused former ministers of 'running away' from decisions on public sector pay, telling the BBC's Sunday With Laura Kuenssberg programme: 'They called an election, they didn't make the tough decisions, they ran away from them and it's now up to us to fix it and to pick up the pieces.'

But a respected expert has warned the Chancellor will have to either increase taxes or borrowing, or make major spending cuts to services, to find the extra money involved.

Paul Johnson, director of the influential Institute for Fiscal Studies, said it would cost an extra £3 billion for schools and the NHS alone.

He told the BBC: 'In terms of the cost, there isn't a specific number that is budgeted for schools, it's probably 1 or 2 per cent, it's certainly nothing like 5.5 per cent, so we'd certainly be looking at at least an additional £1 billion on schools' costs relative to what they're currently expecting.

'And a number at least double that across the NHS if the proposals for the NHS are similar, which it appears that they might be.'

Speaking to the BBC, the Chancellor said she valued public service workers and that 'people won't have long to wait for a decision'.

'There is a cost to not settling, a cost of further industrial action, and a cost in terms of the challenge we face recruiting,' she told Sunday with Laura Kuenssberg, stressing her spending rules were 'non-negotiable'.

'We will do it in a proper way and make sure the sums add up.'

She also said the Government would carry out a review of pensions to help stimulate growth by unlocking cash in schemes.

'People who make sacrifices and save every month to put something aside for their retirement, they deserve better than the returns they're getting on those savings today,' she said, adding there was an 'urgency' from the Government to unlock investment.

It is understood that the Labour had only budgeted for a 3 per cent pay rise which has led experts to claim the extra cash needed will have to come from taxes or borrowing.

If Labour do refuse to support the recommendation it could lead to the government being impacted by the same strike action which dogged the Conservative government for the better half of the last four years.

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During the election, Sir Keir Starmer and Labour ran on a pledge that their plan would be 'fully costed' and the party would not raise taxes on workers aside from those stated in their manifesto.

However the risk of strike action could soon loom over the government if it does not introduce the proposed wage increases.

Daniel Kebede, the general secretary of the National Education Union, told The Telegraph: 'If the Treasury intervenes and makes a pay award below 5.5 per cent, that would be highly inflammatory and a strike would be unavoidable.'

Treasury minister James Murray refused to be drawn on whether the Government would implement the recommendations of the pay review bodies today.

Asked what Chancellor Rachel Reeves meant when she said she would address pay issues 'in a proper way', Mr Murray told the Sunday Morning With Trevor Phillips programme: 'What the Chancellor means by that comment is that her approach is to look at the pay review bodies' recommendations and then she will come to Parliament at the end of the month and set out our response in the context of the public finances and the public spending inheritance that we have in Government.'

He added: 'I think what's not helpful for me to do for any worker in the public sector is for me to pre-empt the process that we are going through right now.'

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