Cabinet split over Blair's public sector pay reforms

A Cabinet row has broken out over Tony Blair's public-sector reforms after two senior ministers blocked plans to end the "two-tier workforce" when services are taken over by private firms.

John Prescott, the Deputy Prime Minister, is trying to broker a peace deal amid a bitter dispute over the pay and conditions of new workers recruited by private sector companies running public services.

Patricia Hewitt, the Trade and Industry Secretary, and Ian McCartney, the Labour Party chairman, are pressing the Cabinet to honour repeated pledges by Mr Blair to end so-called "two-tierism." But they are locked in a power struggle with John Reid, the Health Secretary, and David Blunkett, the Home Secretary, who are worried that the plan could jeopardise reforms such as privately run prisons and diagnostic and treatment centres.

The Government has already ended two-tierism in local authorities and trade unions are furious that the deal has not been extended to central government. A long-awaited announcement was due at a meeting of Labour's national policy forum later this month but is now in doubt because of the dispute. One minister said: "There is a big bust-up over this. It is bloody. Both sides are digging in and John Prescott is trying to sort it out."

Mr Blair faced further criticism over his reforms yesterday after it emerged that the Office of National Statistics (ONS) was to change the way productivity in the NHS is measured. Ministers claim the current system is flawed because, for example, it counts as a cut in efficiency if nurses spend more time with patients.

The change could transform a fall in NHS productivity of up to 20 per cent since 1997 into a small net gain. Oliver Letwin, the shadow Chancellor, accused the Government of pre-empting an independent review of the system. He asked: "Could it have anything to do with the political timetable, or the fact that ministers recently had a meeting with officials to discuss changes to the productivity figures of the public services?" Blairite cabinet ministers rallied round yesterday to support the Prime Minister's reforms. Charles Clarke, the Education Secretary, admitted there were "differences of emphasis" but said ministers were united behind the programme. Mr Clarke, who has clashed with Gordon Brown in the past, went out of his way to deny that the Chancellor was against radical reforms to the public services.

"The Chancellor is totally committed to the reform agenda and believes very strongly in the reform agenda right across the range," he said. "His record in the Exchequer has been very strong. His conduct of the economy has enabled us to address the reform agenda. It would not have been possible without that."

Senior Whitehall officials said the Prime Minister had to "calm down" Mr Prescott last Saturday at a hurriedly convened meeting in Downing Street to prevent another dispute overshadowing next week's launch of the education five-year plan. Mr Blair and Mr Clarke had to give Mr Prescott assurances that the proposals would not mean the privatisation of secondary schools.

The Deputy Prime Minister was furious at reports that Dulwich College, a £9,300-a-year private boys' school, would be given £18m of taxpayers' money to set up one of 200 new city academies. "Prescott was furious but he was calmed down by the assurances he was given at the meeting. There is no attempt to privatise schools," said one source. It was made clear that the private sector was investing huge sums in the city academies, which will remain firmly in the state education system.