Local Government Employers (LGE) fears if a three-year pay deal for public sector workers is set too high it could result in cuts to services and job loses.
Chancellor Alistair Darling proposed to set pay for public sector workers for three years instead of one year in a bid to to provide "long-term security" and "help curb inflation".
Mr Darling argued that the plan, which would effect an estimated 5.5 million workers, including nurses, the police and public servants, would be "a huge step forward for public sector workers" and would "help individuals and families plan for their future".
'Affordability balance needed'
But Brian Baldwin (Lab), chair of the LGE's negotiating team, warned that any pay settlement had to be both affordable to the tax payer and councils, and make sure local government remains an attractive place to work.
Cllr Baldwin said: "It must be borne in mind that if the pay settlement is set too high then local authorities will have to make unpleasant choices between cutting front-line services and laying off staff, neither of which either the unions or the employers want to see."
TUC warns of conflict
The Trades Union Congress' calls for an 'opt out' if inflation soars was rejected by Mr Darling. He said: "I would be very reluctant to get ourselves in a situation where its a three-year deal but its not quite a three-year deal."
The TUC also said the centralised pay target of 2% represented a "significant cut in living standards" and warned of conflict.
Meanwhile, Unite the Union council workers from across the country are set to rally Birmingham City Council on 12 January to oppose the council's plan to tear up employment contracts and re-hire staff on new terms and conditions. Councillors took the decision to introduce an equality system to end discrimination against women workers.