The Government has risked a fresh clash with unions after the Chancellor announced plans to cap public sector pay rises to 1% when a current wage freeze ends.
George Osborne told MPs that further restraint on public sector pay was needed from 2013/15, saying the Government could not afford a 2% rise assumed by some departments.
Local government and health workers are among millions of public sector workers whose pay has been frozen for two years, which has worsened the bitter dispute over pensions.
The Chancellor also announced he has asked the pay review bodies to consider how public sector pay can be made “more responsive” to local labour markets.
Unions believe this is a move towards regional pay rates, something they will strongly oppose.
“This is a significant step towards creating a more balanced economy in the regions that does not squeeze out the private sector,” said the Chancellor.