However, Mr Dorrell, Financial Secretary to the Treasury, said that a freeze on the public sector pay bill would not rule out wage increases for those who earned them.
The Treasury minister's 20- minute speech was heard in silence and received polite applause. His strictures on public sector pay came 24 hours after his boss, Kenneth Clarke, Chancellor of the Exchequer, condemned excessively high pay awards in boardrooms.
Writing in Today newspaper, Mr Clarke said he disapproved of some of the high salaries paid to directors. He conceded that taxes for the highly paid had been reduced, but said that this should be borne in mind when salaries were set.
John Major and John Smith clashed in the Commons yesterday over top salaries. The Prime Minister reiterated his opposition to excessive salary increases, but said it was a matter for companies to decide.
Mr Dorrell, the first Tory minister to address a TUC meeting since Margaret Thatcher when she was Secretary of State for Education, told 300 representatives at TUC Congress House: 'Any increase in pay will have to be funded, not by increased resources, but by better efficiency within the organisation.'
He said: 'It seems self-evident to me that if the level of a service remains constant there should be no more cash provided to pay for it.' Traditional public sector pay structures had not placed sufficient emphasis on performance. 'The result has been that rewards have been linked to longevity of service rather than quality of output.' Mr Dorrell said the Government's focus was on value rather than cost, and 'customers rather than producers'.
Earlier, the minister sat impassively as John Monks, TUC general secretary, told him that unions were opposed to public services bearing the main burden of the pounds 50bn public-sector deficit.
Mr Monks, whose invitation to Mr Dorrell emphasises his determination to establish links with all political parties, said public servants were angry about last year's government-imposed 1.5 per cent limit on pay. They were also furious about cuts in services and the prospect of job losses.
During a brief question-and- answer session, John Sheldon, general secretary of the National Union of Civil and Public Servants, told the minister that morale among public service workers was at an all- time low. Alan Jinkinson, general secretary of Britain's biggest union, Unison, said: 'The combination of job losses, pay restraint and persistent cuts in services makes for an explosive cocktail.'
Mr Dorrell said later there had been 'clear points of difference' with the unions. Mr Monks said: 'He was hard and uncompromising on pay, and that did not go down well because we are feeling uncompromising as well.'
Jack Dromey, national secretary of the Transport and General Workers' Union, said: 'I would give Mr Dorrell 6 points for courage, 5.7 for artistic impression and nil points for content.'