Labour faces new backlash from unions over pensions

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Tony Blair is heading for another row with the trade unions and the left - this time over pensions - but, far from seeking compromise, the Labour leader will tomorrow raise the stakes with a defiant speech in the City of London.

Aides to Mr Blair say his address, to an audience at the London International Financial Futures Exchange, will make clear Labour's relationship with business is now "at least as important" as that with the unions.

More evidence of that emerged last night when Labour announced that Bob Gavron, a director of the printing firm St Ives, is donating pounds 500,000 to the party. Mr Gavron, who founded the firm with pounds 5,000, said that "the days when the Tory Party was the automatic party of business are over" and that Labour has better policies for "encouraging entrepreneurs, start- ups and small businesses".

Mr Blair's new overtures to the business community are certain to add to the tensions clearly on show at the TUC last week, and increase the chance of a union backlash at the Labour Party conference in two weeks' time. That could mean conference defeats for Mr Blair, particularly over pensions.

The leadership faces a left-wing drive, championed by Baroness Castle of Blackburn, to restore the link between pensions and earnings. Labour's shadow social security secretary, Harriet Harman, met Lady Castle but failed to persuade her to support frontbench proposals that target the 700,000 poorest pensioners, instead of restoring the link across the board.

At the party conference, Lady Castle will speak in defence of her plans at the Tribune rally - just before Gordon Brown, the shadow chancellor. She is also expected to speak from the conference floor.

Big trade unions, including the Transport and General Workers' and the GMB general union, have policies that commit them to a restoration of the link with earnings and will therefore be under some pressure to vote against the leadership.

One union source said: "It's not going to be an easy conference. If last week hadn't happened, it would have been bloody difficult anyway." Another added that last week's row between Labour and the unions "will make it more difficult".

Labour officials are also aware of the impact that a speech from the conference floor from Lady Castle, with support from Jack Jones, could have on delegates. Because Mr Blair won all the votes at last year's conference, any defeat would be widely seen as a big set-back for him.

None the less, tomorrow Mr Blair will tell his City audience that Britain's future success depends on higher productivity. "Our objective is to make the mass of British people better-off by concentrating on the fundamentals necessary for medium-term success. The key to the argument is increasing productivity," he will say.

He will also call for low inflation, incentives for long-term investment and more partnerships between the public and private sectors. "It is a commitment to raising productivity that needs to apply across the economy in private and public sectors."

If the party conference does witness a backlash against the leadership, one senior party source said it would quickly be shrugged off. "The days of conference inflicting defeat on the leadership, and having the power to overturn policy that future Labour ministers are expected to implement, are long behind us," he said. He predicted that the pre-election manifesto, put forward by the leadership, will be agreed by party members.

Moves were still afoot to prevent a revolt. Ms Harman argued yesterday that the restoration of the link between pensions and earnings would, at first, add only 50p a week to pensions.

Her proposal involves scrapping entitlement to income support but guaranteeing all pensioners a minimum income. Those without occupational pensions would get most support from the state.

Ms Harman said: "The question every delegation to conference must ask themselves is, should our priority be attacking inequality and poverty? If it is, that is best achieved through our new proposals - not Lady Castle's."