NHS staff will still receive a payrise next year
Chancellor Alistair Darling has announced a two-year 1% cap on pay increases for NHS workers.
But he has also pledged to increase spending on NHS services, and said it would continue to rise above inflation after 2011.
All NHS staff received a pay increase of 2.4% this year, and pay will still rise by 2.25% next year, as part of a three year deal.
The ceiling will kick in the financial year following - 2011-2012.
Thanks to a three year pay deal agreed prior to the downturn, NHS staff have seen pay increases above interest rates.
But after next year's deal comes into force, all further public sector settlements will be capped at 1%. Government contributions to public sector pensions will also be limited, saving £1bn per year, the chancellor said in his pre-budget report.
These are all measures aimed at halving the UK's budget deficit in four years.
While confirming that spending would increase, he accepted that the period ahead would be "challenging for our public services". But these he stressed "were in a better state than they have been for decades".
Dr Hamish Meldrum of the doctors' union, the BMA, welcomed the decision to protect frontline services.
"However, it is a grave error to penalise hard working NHS staff - who have already delivered efficiency savings of £10 billion - with arbitrary caps on their pay," he said.
"The government could have instead made real savings by slashing their bureaucratic and wasteful market based policies."
But Dr Peter Carter from the Royal College of Nursing said the NHS had to accept that these were difficult times.
"UK Plc is broke - so we have to be realistic. Our priority is to preserve jobs, and the priority running alongside that it to preserve frontline clinical services. There is no point looking for bigger pay rises if that is going to be funded by making people redundant."
But he added: "We believe there is huge scope in the NHS for efficiencies. What we want to do is work with the government and those who aspire to be in government to try to ameliorate any damages to frontline services."
NHS Confederation Chief Executive Steve Barnett welcomed the confirmation that NHS spending would continue to rise in line with inflation after 2011, but added that the the rising cost of providing health care meant there were "real challenges" ahead.
"The NHS Confederation has already said that savings and efficiencies of between £15-20bn need to be found in the NHS in the next five years and today's announcement only serves to confirm the scale of the challenge which lies ahead," he said.
"Given this context the announcement of a 1% cap on public sector pay settlements in 2011-12 and 2012-13 is hardly surprising but any changes need to be carefully managed to avoid creating shortages of trained staffed or disruption of services."
The King's Fund also noted the impact of changing health needs. "As the population continues to grow and to age, more people will need care. Just to meet these extra demographic demands requires an additional real rise for the NHS of 1% a year," said the thinktank's chief economist, Professor John Appleby.
"There will have to be trade-offs if we want a health care system which is fit for the 21st century. Every pound spent in the NHS will need to be stretched further, but at the same time ensuring patient safety and quality of care are not compromised."