Public sector pay to be frozen again

A CLAMPDOWN on public sector pay bills for the second year running will be unveiled by the Chancellor, Kenneth Clarke, this week when he submits the Treasury's evidence to pay review bodies covering 1.4 million public employees.

The decision to continue the current squeeze on pay will in effect cover about

5 million employees and follows Mr Clarke's decision to raise interest rates by a half of one per cent to prevent a resurgence of inflation.

Mr Clarke's submission, formally setting out the economic background to the 1995-6 annual pay round, will make it clear that in general increases in pay will have to be funded by productivity increases. The move is in line with advice already given to Cabinet colleagues that the Treasury will not fund public sector pay increases in the annual review of public spending by the Cabinet EDX committee, which he chairs.

Mr Clarke made it clear when he raised interest rates to 5.75 per cent on Monday that he was determined to prevent the recovery being derailed by inflation. He also warned that a number of factors including local authority borrowing and EU contributions would make it more difficult this year than last to keep to the pounds 263bn control total agreed by the Cabinet.

The move will anger public sector union leaders, some of whom have already warned that dearer mortgages as a result of the interest rate rise would feed into pay claims. But it will not come as a total surprise: Mr Clarke has already given heavy indications he intends to continue bearing heavily down of public sector pay.

The crucial departure from previous policy came last year when the Chancellor announced, in effect, a freeze on pay bills after a year in which increases without productivity were limited to 1.5 per cent.

The Treasury submissions formally cover employees whose pay is fixed by five review bodies, those for nurses, doctors and dentists, teachers, the armed forces, and top civil servants and judges. But they will also stand as a clear warning to government departments that other public sector workers, including civil servants and local authority employees, will also be covered.

The imminence of the submissions was confirmed in Whitehall as Mr Clarke's predecessor, Norman Lamont, coupled warm praise for Monday's interest rate rise with a prediction that there would be further ones on the way.

Mr Lamont said he expected to see rates 'edging up' in the next year towards 7 per cent and the Government would still have room for 'modest' tax cuts before the next general election.

In terms that will alarm some Tories already anxious about the impact of Monday's hike, the former Chancellor said that British rates had been 'abnormally low'. 'So I think we will see more rate rises in the next year.

'Five-and-three-quarters per cent is a low rate. I would have thought we ought to be edging up over 6 per cent towards 7 per cent.'

Mr Lamont denied that the next election had to be fought with rates at their current level for the Tories to win and insisted that the Government would do well the longer the recovery lasted.

Meanwhile, anxiety about Mr Clarke's warning that there would be no tax cuts this autumn emerged when David Shaw, vice-chairman of the Tory backbench finance committee, said some backbenchers would want to make 'further representations to both the Prime Minister and the Chancellor on that issue'.

Mr Shaw added: 'It should be fairly evident to government ministers and those in Parliament that the party out there as well as people in the country at large want to see some sort of down-payment on tax cuts and want them to start soon.'