Video report by ITV News Politics Editor Robert Peston; Words by Westminster Producer Lucy McDaid
Millions of public sector workers, including teachers and junior doctors, have been offered pay rises of up to 7%, but existing budgets will need to be re-prioritised to help fund them.
Teachers will be given a 6.5% increase for 2023-24 which Rishi Sunak confirmed is "fully funded", with school budgets protected and money within the Department of Education "reallocated".
Delivering a press conference on Thursday, the prime minister said the offers are "final" and will not be funded by government borrowing, with large sums needing to be raised by "significantly" raising fees of migrants' visa applications and NHS charges.
Disputing concerns that spending "cuts" will have to be made, Mr Sunak insisted resources would also need to be "re-prioritised" within departments.
Mr Sunak and his Chancellor Jeremy Hunt finalised the public sector pay deals on Thursday against a backdrop of stubbornly high inflation, which Mr Sunak said he remains committed to halving "over the course of this year".
Public sector pay rises: Who will get what?
Policing - 7%
NHS consultants, GPs, dentists - 6%
Junior doctors - 6% and an additional consolidated £1,250 increase
Prison officers - 7%
Armed forces - 5% and an additional consolidated £1,000 increase
Teachers - 6.5%
Senior civil servants - 5.5%
The settlement may seem like good news, but it may bring challenges, Politics Editor Robert Peston reports
A rejection of the recommendations would have significantly increased the chances of continued industrial action, on the day junior doctors in England started their longest walkout yet.
But in what he described as a "major breakthrough", Mr Sunak revealed on Thursday that teachers from the NASUWT Union in England called off strike action after the pay deal was announced.
Speaking to journalists in Downing Street, he issued a warning to other trade unions and workers still involved in industrial action, stressing that the new deal is "final".
"There are always choices. Budgets are not infinite. When some ask for higher pay, that will always create pressures elsewhere," he said.
"It is now clear momentum across our public services is shifting. The vast majority who just want to get on with their life's calling of serving others are now returning to work.
"Today's offer is final. There will be no more talks on pay. We will not negotiate again on this year's settlements and no amount of strikes will change our decision."
He said the accepted recommendations were a "fair deal for the British taxpayer".
But the British Medical Association (BMA) has rejected the offer, saying the latest announcement represents "yet another pay cut in real terms".
BMA chairman of council, Professor Phil Banfield said: "It completely ignores the BMA's calls to value doctors for their expertise by full pay restoration to 2008/2009 levels.
"With an NHS in crisis, seven and a half million patients on waiting lists, chronic underfunding and doctors being directly targeted with offers of work in Australia, this Government should not be supporting pay uplifts which don't reverse years of sub inflation pay awards.
"The narrative that public sector pay fuels inflation has been discredited by economists.
"Public sector workers are not only working in underfunded services, but they are now being asked to pay for them through further cuts and proposed increased visa costs. The political choices this Government is making continue to make ordinary people sicker and poorer; that is an unconscionable position for a 'civilised' society to be in."
'If we're going to prioritise paying public sector workers more, that money has to come from somewhere else', explains Rishi Sunak
The prime minister made clear on Thursday that extra pay for teachers will be "fully funded", with front-line school services protected from any spending cuts or re-prioritisations.
Schools will get an additional £525m sum in 2023-24 and a further £900m in 2024-25.
But for other public sector workers, who haven't been given the same guarantee, Mr Sunak insisted "it's not about cuts" but about department's "re-prioritising" resources.
Questions remain over what this means in practice, but it is likely spending cuts will be needed in certain areas to fund the extra pay for workers.
The Prospect union's general secretary Mike Clancy said the Government was "taking a knife to public services to pay for these pay rises", showing "they have learned nothing from the austerity years".
The union rep, who represents public workers including civil servants, added: "For a Prime Minister and Chancellor who came into office promising economic stability, the chaotic handling of this process will inspire little confidence in workers worried about their futures during the worst cost-of-living crisis in a generation".
Plans have also been drawn up to raise an additional £1bn through increased immigration health surcharges. Mr Sunak said the fee will go up to £1,035 - the third rise in seven years.
There was also be a 15% hike in the cost of work and visit visas, and an increase in the cost of study visas, certificates of sponsorship, wider entry clearance, leave-to-remain and priority visas among others by at least 20%.
Speaking in the House of Commons, shadow treasury minister Pat McFadden asked if the increases would be paid for from cuts to hospital and school building programmes.
He asked: "What is the Government's estimate of the impact on public services of funding the rises in this way that he has set out?
"The Chief Secretary [John Glen] talked of reprioritising. Does that mean the Government will cut back on capital investment in schools and hospitals to fund these increases?
"The economic backdrop that we have colours everything in this statement. It is no longer a matter of judging if the Conservative Government will fail, the fact is they have already failed and that is why the general election cannot come soon enough."
In response, treasury minister John Glen said the decisions made "mean no new borrowing, no cuts to the front line, no new taxes and no negative impact on inflationary pressures."
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