Osborne bets the election on public sector pay

Tories risk alienating four million voters with pledge to block wage increases for state employees earning more than £18,000
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The Conservative Party will risk the wrath of four million public sector workers at the general election by proposing to freeze their pay as it seeks a mandate for big spending cuts.

In a major political gamble, the shadow Chancellor, George Osborne, yesterday unveiled a £7bn-a-year cuts package that includes a pay freeze in 2011 for all public sector workers earning more than £18,000 a year.

He is hoping that the voters will endorse tough action to tackle the deficit in the public finances – even if it involves personal sacrifices.

Mr Osborne's package to save £23bn over a five-year parliament means that David Cameron could fight the election on the most austere manifesto in recent memory.

The revelation sparked furious exchanges with Labour in an early taste of next year's campaign.

Labour ministers, who have called for a pay standstill for 40,000 senior public servants next year, suspect that the more severe Tory squeeze will backfire. Trade unions reacted angrily, warning of industrial action.

Mr Osborne told the Tory conference in Manchester: "Anyone who tells you that these choices can be avoided is not telling you the truth. We are all in this together."

He said the pay squeeze, to be recommended to pay review bodies, would save £3.2bn a year – the equivalent of 100,000 public sector jobs. Other savings include:

* A £50,000-a-year cap on the pensions of senior civil servants, town hall bosses and quango heads to reduce the taxpayers' liabilities by hundreds of millions of pounds;

* Reducing the running costs of Whitehall, quangos and government agencies by one-third to save £3bn a year – including through job cuts;

* Retaining the 50p top rate of tax on earnings over £150,000 a year which Labour will bring in next April;

* Withdrawing tax credits for families with incomes of more than £50,000 to save £400m a year;

* Restricting child trust funds – under which the Government gives babies a £250 voucher to encourage their parents to save – to the poorest third of families and disabled children to save £300m a year.

To encourage saving, Mr Osborne announced that the Tories would reverse Gordon Brown's £5bn-a-year raid on pension funds – but not until after the election after next.

The one million lowest-paid public sector workers would not be covered by the freeze. Armed services personnel on active duty abroad would be compensated by doubling their operational allowance to an average of £4,800 for a six-month tour.

The shadow Chancellor promised that child benefit, winter fuel payments and free TV licences for the elderly would not be cut.

He threatened bankers with a special tax on their bonuses or pay if they return to the undeserved rewards which contributed to the financial crisis. "I believe in the free market, not a free ride," he said.

Mr Osborne confirmed that the age at which men qualify for the basic state pension would rise from 65 to 66 in 2016. But after confusion in Tory ranks, he made clear that women would not be affected until 2020.

He said the Tories would restore the link between the state pension and earnings by the end of the next parliament. That gives them the option of delaying the move to 2015, three years later than they promised on Monday. The shadow Chancellor presented his austerity package as in tune with "modern Conservatism". He declared that the real dividing line in British politics was "progressive Conservative reform or Labour frontline cuts".

But Liam Byrne, the Chief Secretary to the Treasury, said: "George Osborne comprehensively failed the economic credibility test today. He set himself a high bar and then fell miles short. He said 'We're all in this together' but then attacked the mainstream middle while defending a tax cut for the richest families. The Tories were expected to set out a credible budget policy that could match our plan to half the deficit in four years. Yet all we got was a chaotic U-turn on the retirement age and a speech that cost even more than it saved."

Irwin Stelzer, an economist, said Mr Osborne had not shown economic vision. His address was "a bookkeeper's column, not a chancellor's speech".

Robert Chote, the director of the Institute for Fiscal Studies, said the £7bn of savings Mr Osborne had earmarked equated to about one-sixth of the tightening that the next Government would have to make over a four-year period. "£7bn is not to be sniffed at. It makes a dent," he said.

"It's important to bear in mind that for example most men are not working by the time state pension age arrives. So it's not clear that the change that they suggest will actually deliver quite the increase in real working lives, and therefore the increase in tax revenues and reduction in pension spending that underlines their costing."

How the Tories would cut public spending

Pay

One-year pay freeze in 2011 for the 4 million public sector workers who earn more than £18,000 a year.

Saving £3.2bn

Verdict Bold but politically risky because of the numbers affected.

Whitehall

Running costs to be cut by one-third over a five-year parliament. Squeeze also applies to quangos and government agencies.

Saving £3bn a year.

Verdict Easier said than done; would need swingeing job cuts (and costly pay-offs).

Tax credits

Halt tax credits to households with incomes over £50,000 – a maximum loss of £10 a week for families with an income of more than £48,175.

Saving £400m a year.

Verdict Could be portrayed as a tax rise for the middle classes.

Pensions

Retirement age to go up: men to qualify for the basic state pension at age 66 from 2016, instead of 2026 as Labour proposes. Retirement age for women to gradually rise to 66 by 2020.

Saving £13bn a year

Verdict National Institute of Economic and Social Research says savings will not accrue until 2020.

Child trust funds

Stop new spending for better-off families but keep them for disabled children and the poorest one-third of families.

Saving £300m a year.

Verdict Critics say the Government's scheme has flopped.

Public sector pensions

Impose a £50,000-a-year cap on pensions for senior civil servants, local government executives and quango heads.

Saving hundreds of millions of pounds, but spread over a decade.

Verdict A vote-winner.

Pay freeze: Views from the public sector

Peter Smyth, detective constable, Metropolitan Police

"A pay freeze will hurt the lowest ranking and the less experienced officers more, because obviously they will be paid the least, but that is the same in every job. I understand that politicians need to look at cutting spending, but they should be targeting people who do not want to work by cutting the amount they spend on benefits, rather than the wages of people who want to work."

Eleanor Smith, 47, nurse, Birmingham Women's Hospital

"A pay freeze is not a freeze at all – it is a cut when you take account of inflation. My concern is: how long would it last?I thought the Tories were supposed to have changed. Instead of clobbering people who pay taxes, why can't they tighten up on companies who use elaborate schemes to avoid tax?"

Lesley Ward, 55, primary school teacher, Doncaster

"If you've just finished teacher training and you've got a massive student debt, a pay freeze isn't exactly going to motivate you to carry on... People will see bankers still getting their bonuses... It's not exactly the best rallying call for the public sector to vote Tory."

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