Jeremy Hunt risks stoking inflation and a surge in public debt if he gives in to striking doctors' and teachers' demands for higher pay, the International Monetary Fund (IMF) has suggested.

The warning comes amid mounting pressure on the Chancellor to resolve a wave of public sector industrial action, with junior doctors walking out for four days in an attempt to secure a 35pc pay rise.

The IMF said a combination of “lacklustre growth” across advanced economies and “further increases in public wages and other social spending” being considered will place the country’s borrowing on an sharply higher path. 

The fund said the projected increase in gross UK debt from 84.5pc of GDP in 2019 before the pandemic to 113.1pc of GDP by 2028 means Britain is facing a “steeper upward trajectory” than other advanced economies.

The IMF said data covering 30 developed economies, spanning three decades, showed big public sector pay rises “may have a significant and lasting effect on private wages” by influencing pay demands and helping to drive up inflation, especially when unemployment is low and workers can demand more money.

It also warned that history suggests the impact on prices and wages will continue “for many quarters after the spike”.

Public sector wages rose by 4.8pc in the three months to January compared with a year ago in the fastest increase since February 2006. 

However, this still lags behind private sector average increases of 7pc over the same period, according to the Office for National Statistics (ONS).

Unemployment in the UK remains close to historic lows at 3.7pc, with the Bank of England noting that the job market remains tight, even as pay demands slowly start to cool.

The IMF said this was an important factor in determining how public sector pay deals influence wages across the economy. 

In its latest FIscal Monitor Report, it said: “The impacts of government wage hikes on private wages and core [inflation] are significantly larger and longer-lasting when labour markets are tighter."

“The findings imply that during periods of high inflation and tight labor markets, public wage policy should balance the need to attract and retain high-quality civil servants against the risk of fomenting inflationary pressures.”

While fair pay was important to prevent extensive brain drain in the public sector, big increases risked making inflation more persistent and keeping interest rates higher for longer, the IMF added.

The Fund also laid bare the extent to which debt and the size of the state will rise owing to massive spending on energy bill subsidies and a growing benefits bill, including the triple lock on state pensions that keeps payments growing in line with inflation.

The UK’s public finances look significantly more gloomy in the IMF’s latest projections compared with its verdict in October last year.

The world's lender of last resort expects government revenue to increase significantly as Britain’s tax burden rises and high inflation pushes more workers into higher tax bands.

Expenditure and debt are also forecast to rise substantially, bringing into question whether Jeremy Hunt will be able to get debt as a share of GDP falling within five years.

The IMF said that Government revenues were equal to 38.9pc of GDP last year.

This figure is projected to peak at 39.2pc next year before eventually falling back to 35.9pc in 2027.

This is much higher than the IMF's October assessment, when it predicted that revenues would rise from 37pc in 2022 to a peak of 36.3pc, before falling to 35.1pc.

Despite the boost to the Government’s finances, the IMF said that spending and debt will also be much higher.

It judges that expenditure will gradually fall from 45.1pc of GDP in 2022 to 39.8pc in 2027. The fund had earlier estimated a fall from 41.3pc to 36.1pc.

Meanwhile, the IMF now believes gross debt was 102.6pc of GDP in 2022, up from 87pc. 

It expects debt levels to keep rising every year before reaching 113.1pc in 2028. 

Its previous forecast had predicted they would fall to 68pc in 2027.