Senior Treasury sources said yesterday they were opposed to the spending departments seeking to extend the pay norm to make it easier to meet Treasury demands for cuts in their budgets. 'It would not stick,' one ministerial source said.
The Prime Minister said the issue would be resolved 'in the very near future', but with the Treasury's opposition, it is almost certain the Government will be seeking wage restraint without a formal pay norm.
Treasury ministers fear the row has made it more difficult to seek cuts in some budgets. They blame the Department of Health for leaks to stop cuts in free prescriptions for the elderly and children, though ministers refuse to rule it out until the spending battles are over in the autumn.
Lord Howe, the former Chancellor, and Lord Callaghan, the former Labour Prime Minister, urged John Major to revive the Cabinet 'think tank' that Lady Thatcher disbanded for 'thinking the unthinkable' in the 1980s after a paper proposing deep cuts in the welfare state was leaked.
Lord Howe told a sub-committee of the Treasury and Civil Service Select Committee that the Central Policy Review Staff would have a wider function than the Number 10 policy unit, looking at medium-term questions. 'I put a paper before the Cabinet on exactly the same ground as the Chief Secretary (Michael Portillo) is now presenting to the nation.'
Unhappily, Lord Howe said, the Treasury allowed the paper to be illustrated with figures. When it was leaked, it 'frightened the horses in the street and set back the whole process half a decade if not a decade'.
Lord Callaghan called for a code of practice to be established for the Civil Service. 'There hasn't been any conscious arrogance by the Government, but because of the length of time they have been there, the Civil Service at the top levels has unconsciously accepted or been repelled by the flavour that has come from the Government,' he said.