Philip Hammond has insisted pay policy has not changed and the “right balance” must continue to be struck in terms of what is fair for workers and taxpayers.
The chancellor, who is under pressure from colleagues to lift the 1% public pay cap, said he understood people were “weary” after seven years of austerity.
But speaking in London, he rejected calls to “take the foot off the pedal”.
Government must “hold its nerve” in the face of calls for a “different path” of higher taxes and borrowing, he said.
Mr Hammond is facing a growing chorus from within his own party for him to reconsider the 1% limit on increases in public sector salaries, which has been in place since 2012.
Foreign Secretary Boris Johnson became the latest senior figure to express his support for a rethink on Monday, with sources suggesting he believed public sector workers could enjoy higher rewards in a “responsible way” that did not damage the public finances.
Rises of 1% for dentists, nurses, doctors and the military have already been agreed for this year and No 10 said ministers would respond to pay review bodies in due course.
Speaking to business leaders at a CBI dinner, Mr Hammond acknowledged there was widespread frustration at the stagnation in real-terms pay growth at a time of rising inflation.
Addressing the current debate over public sector pay, he said government policy had “always been designed to strike the right balance of between being fair to our public servants and fair to those who pay for them”.
“That approach has not changed; and we continually assess that balance. But we do, of course, recognise that the British people are weary after seven years hard slog repairing the damage of the great recession.
“They have travelled a long way… but still the sunlit uplands seem stubbornly to remain one further ridge away.
“And once again, some are questioning whether we should abandon the economic plan that has brought us so far… and take a different path.”
After the Conservatives’ failure to win an overall majority, he said it was up to his party to again make the case for a market-based economy, underpinned by sound public finances.
BBC political editor Laura Kuenssberg
Arguably the simpler part of the debate has been had – many public sector workers are feeling the pinch, and there is more and more pressure to remove the limit on pay rises. The more complicated bit, who or what would pay for the increase, is a conversation that’s yet to happen.
Whatever Boris Johnson and Michael Gove have said in the last twenty four hours, don’t expect anything to happen in a hurry. The first pay review body is not due to report for another few weeks.
It seems unlikely that the government will announce any plan to either ditch the cap or promise to accept the decisions of the review bodies before then.
It’s not in either Theresa May or Philip Hammond’s DNA to make quick decisions. Read more from Laura
“After seven long and tough years, the high-wage, high-growth economy for which we strive is tantalisingly close to being within our grasp,” he added.
“It would be easy to take our foot off the pedal. But instead we must hold our nerve… and maintain our focus resolutely on the prizes that are so nearly within reach.”
The country needed “the right Brexit deal agreed in the months ahead… a steady determination to restore our public finances to balance by 2025… and a relentless focus on transforming Britain’s productivity performance”.
The BBC’s political editor Laura Kuenssberg said there were intense discussions among ministers about the political wisdom of shifting position but while there was “change in the air” there was, as yet, no common position.
Labour said immediate action was needed from the government not “just more empty words or infighting from members of the Cabinet”.