There is growing support among ministers for a freeze on the pay of up to two million employees in local government and the National Health Service as part of the deep cuts in public spending plans.
Ministers are prepared for a battle with Nalgo, the white collar local government union, and Nupe, the public employees' union, which together cover more than a million workers.
Senior members of the Cabinet believe a pay strike by those unions would rebound on Labour and help the Government to unite its own ranks, while impressing upon the City its determination to curb inflation.
While there is no evidence that the Government is seeking a confrontation, one Cabinet minister said: 'It would be quite nice to have a Nalgo strike.' A public sector strike could revive memories of the Winter of Discontent, which led to Labour's election defeat and fall from power in 1979.
Ministers are determined to impose tight control on public sector pay as a signal to the private sector to keep its own pay deals below the Treasury's new target for the underlying rate of inflation of 1-4 per cent.
All sides of the Cabinet are united in the belief that capping public sector pay should take priority over cuts in capital projects, such as hospital building. The Treasury had wanted pay rises to be held to about 2 per cent. But since the withdrawal of sterling from the exchange rate mechanism, the stance on public spending has toughened and ministers are now saying they will be seeking zero pay rises wherever possible.
Some groups, such as nurses, who are also members of Nupe, and teachers may be offered more generous pay rises - particularly in the case of teachers - where the Government is eager to see theintroduction of performance- related pay.
Brian Mawhinney, Minister for Health, will give no figure in evidence to the doctors and dentists pay review body, covering GPs and hospital doctors, but the Government is preparing to reject recommendations that exceed its inflation target.
Malcolm Rifkind, the Secretary of State for Defence, whose pounds 24.5bn budget for next year is being squeezed, said yesterday the cuts could lead to Britain reducing some defence commitments. He gave no further details, but the options include scrapping the deployment of air-to-surface nuclear weapons to replace free-fall bombs, reducing the maritime defence role in the eastern Atlantic or withdrawing more troops from overseas bases such as Belize and Cyprus.
Mr Rifkind also made it clear that the European Fighter Aircraft was not threatened. Spending on the EFA would have to be met at the end of the century and the current spending review covers the next three years.
Britain may go ahead alone, if the other partners in the programme, Germany, Italy and Spain, pull out.Reuse content