The Chancellor drew a sharp rebuke from the First Division Association (FDA) which represents top civil servants.  It warned that he risked alienating senior officals who were managing Labour's busy programme of domestic reforms.

in a letter to Whitehall departments, the Chancellor ordered ministers to keep a tight lid on wage settlements "to lock in pay discipline and low inflation".

The letter followed sharp growth in National Health Service pay and a row between the Treasury and the Department of Health over whether doctors and nurses should get above inflation rises.

The Chancellor sought to pare back union demands ahead of the next annual round of bargaining.  He told MP's in the Commons that "public sector pay settlements must be founded on meeting the 2% inflation target".

He also expected the 2% target to apply not only to the coming year but to following years until at least 2009.

The trade unions reacted angrily, criticising what they called a sweeping and arbitrary limit.  An FDA official said "Restricting pay settlements in this way fails to reflect the complexities of the pulbic sector".

UNISON said they would not be happy with attempts to limit increase to 2%>