Another U-turn for Downing Street as local pay plan is scrapped

Downing Street has signalled a U-turn over controversial plans by the Chancellor George Osborne to bring in local pay agreements throughout the public sector.

David Cameron's official spokeswoman said yesterday: "Our case is, unless there is strong evidence to support it – and there is a rational case for it – then it won't change." She was responding to a report in The Independent that Nick Clegg is preparing to veto the idea amid growing opposition from Liberal Democrats, who fear it would widen the North-South divide and spark a political backlash.

Downing Street's statement marks yet another retreat from the measures announced in the Budget in March, when Mr Osborne said: "We're looking to see whether we can make public sector pay more responsive to local pay rates... So we should see what we can do to make our public services more responsive, and help our private sector to grow and create jobs."

The Chancellor has already backed down over four Budget measures: the "pasty tax" on hot takeaway food; higher VAT on static caravans and repairs to historic churches and a cap on tax relief on charitable donations.

Downing Street insisted a final decision would be taken after public sector review bodies, which are investigating local pay, report to ministers next month. But it appears that the Government is preparing the ground for a climbdown to avoid a split inside the Coalition.

Senior Liberal Democrats have argued that any savings would take years to achieve because workers in regions outside London and the South-east would face a pay freeze rather than cuts. One source said: "The controversy and political damage would not be worth the candle." Conservative and Liberal Democrat MPs have expressed concern that their parties could lose seats in the North, the Midlands and Wales if local pay were introduced.

Unison, the largest public sector union, claimed yesterday that almost 100 seats held by Tory and Liberal Democrat MPs could be lost if the Chancellor's plan went ahead. They are targeting MPs whose majority in 2010 was lower than the number of public sector workers in the constituency.

Dave Prentis, Unison's general secretary, said: "At last the Government seems to be listening to our arguments against local pay bargaining. Unison has all the 'strong evidence' it needs to show the Government it will cause a massive increase in costly bureaucracy, lead to key staff shortages and hit local economies and families hard. The reason the Government wanted it in the first place is to drive down wages in the public sector further. It is a vote loser and the Government knows it."

Unions claim the Treasury plan could mean more than 2 million public sector workers suffer an almost permanent pay freeze.