Gordon Brown called today for an effective two per cent cap on public sector pay rises to help keep inflation under control.
The Chancellor also announced that 80,000 civil service jobs are being cut across Government as he delivered an update on spending plans to the Commons.
Mr Brown said it was important to maintain wage "discipline" because goods price inflation had been increasing, partly due to higher oil prices.
In guidance for Pay Review Bodies he added: "It will be important to remain vigilant to the risk of higher pay settlements feeding into higher service sector inflation, and that public sector pay increases do not contribute to the inflationary pressure in the economy going forwards."
In a mini-statement at the end of Treasury questions, he revealed budget cuts were being made across Government departments - including his - in order to invest more money in frontline services.
The Department for Work and Pensions, the Treasury, the Cabinet Office and HMRC must make five per cent cuts, amounting to a 20 per cent real terms decrease over five years.
The Home Office budget has also been frozen.
All other departments must make efficiency savings of 2.5 per cent, he said.
The savings come on top of the £21 billion administrative savings being implemented from the Gershon Review into public sector cost-cutting.
Mr Brown told the House: "As far as the numbers are concerned, 80,000 civil servants, in particular the DWP and HMRC, will be replaced.
"As a net figure it is nearly 40,000 now, as a gross figure it is over 40,000 now.
"We will reach the 80,000 figure by 2008 and we will bring forward further proposals for the next spending round so that we can ensure that we get the most resources to the front-line caring services -which are the priority for this Government."
Tory MPs criticised Mr Brown in the Commons for releasing details of the budget cuts "with a whimper and not a fanfare" at the end of Treasury questions. And Shadow Chancellor George Osborne mocked the 66-page Comprehensive Spending Review update as an "empty document".
He added: "A fundamental look at Government spending would have asked this simple question - how could Labour have taxed so much, spent so much and achieved so little.
"How can they have spent £4 trillion over nine years and have an NHS that is sacking doctors and nurses and a Home Office that is not fit for purpose?"