The Chancellor reinforced his warning to Cabinet colleagues yesterday of the need to stay within the spending limits inherited from the Tories, and ordered them to carry out reviews within their departments to find more savings.
Mr Brown is expected to emphasise the need to keep down pay awards in the public sector in his evidence in September to the pay-review bodies for nurses, doctors, teachers, and the armed forces. "There will be a very tough line on public-sector pay," said the Prime Minister's office.
After years of restraint on pay, a further year of tough controls on pay rises in the public sector could provoke difficulties for the Government. Rapid pay growth in the private sector will increase the pressure for a catch-up in public-sector pay.
New figures earlier this week showed that earnings for private- sector workers are now growing twice as fast as pay in the public services. The gap, which opened up in mid-1993, has widened markedly since early last year - as the Bank of England noted in an assessment of pay pressures in its inflation report this week.
Adam Cole, an economist at City brokers James Capel, said: "The Government faces a big challenge in holding down the public-sector pay bill."
In the year to March, average earnings in the private sector rose by 6 per cent, compared to an increase of just under 3 per cent in public services. Average public-sector pay in the latest 12 months has only just kept ahead of inflation, having fallen in real terms in 1995. All the indications are that private-sector pay will continue to accelerate.
Recent business surveys report increasing concerns about skill shortages and rising salaries, especially in service industries.
This suggests that if the rise in the total public-sector pay bill is held down, public services will face either more job cuts or growing difficulties in recruiting and retaining staff.
Many employment experts expect the eventual introduction of a national minimum wage to add to the headache for public- sector employers because maintaining differentials will lead to demands for increases higher up the pay scale.
Union leaders are privately dismayed that ministers are insisting on keeping the lid on public-sector pay but were also keen yesterday not to antagonise the Government for fear of provoking the withdrawal of plans to legislate on industrial relations.
The "big prizes" for the union movement are a law on union recognition and the repeal of legislation which means that union members have to keep re-authorising the deduction of subscriptions from their wages.
Employees' representatives were also loath to attack the Government on the day it lifted the ban on unions at GCHQ and in the wake of the pledges to sign the Social Chapter of the Maastricht Treaty and introduce a national minimum wage.
Yesterday's warning to Cabinet ministers of the need to trawl through their departmental budgets in a swift review of spending priorities was foreshadowed in the Labour election manifesto, and could herald changes for 1998-99. Whitehall sources said it could mean moving savings from defence, where a fundamental review of commitments is being carried out, to health, education or other welfare budgets.
Frank Dobson, the Health Secretary, this week met BMA leaders, who are concerned at the inadequacy of the health budget inherited from the Tories.
One BMA source said family doctors would threaten to walk out of their pay-review body if they were held to around the inflation rate of 2.5 per cent for another year.
The Downing Street spokesman said: "The Prime Minister and the Chancellor made brief contributions (at Cabinet) on the importance of the public- spending review and both stressed the importance they attached to it and their desire that their colleagues should be going over all the programmes in their departments to make sure money was being well spent."
After the reviews, ministers will enter discussions with Chief Secretary to the Treasury Alistair Darling and, if necessary, the Chancellor.
The initial proposal in opposition was for a one-year review but it now appears that Mr Blair and Mr Brown are keen to proceed as quickly as possible.
Downing Street insisted there was no date yet for the Budget and that the Treasury would announce it in due course.Reuse content