Treasury threatens more pay restraint

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THE TREASURY has threatened a further year of tight pay restraint on the public sector with a warning to ministers to rein back public spending.

The Chancellor, Kenneth Clarke, expressed concern at a surge in spending, and insisted on pay restraint, when he began the annual public expenditure review by reconvening the EDX committee of the Cabinet.

Mr Clarke told ministers that there would be no room for vote- winning tax cuts before the next general election unless they cut back public spending.

Provision for civil service and public sector pay was frozen for 1994-95 and 1996-97 at its 1993-94 levels in the November Budget. Pay increases will therefore have to be paid for by improvements in productivity, but this is likely to build up resentment among the public sector unions.

Michael Portillo, the Chief Secretary to the Treasury, has told Cabinet colleagues to report to him on the impact that would be caused by cuts in their budgets of 2.5 per cent and 5 per cent.

Mr Portillo used the same tactic last year to force his colleagues to get to grips with cuts in their budgets. Ministers regard the Treasury warnings as a routine part of the annual war on spending.

Ministers are certain to treat the warnings with scepticism, if it emerges the public sector borrowing requirement is substantially less than the record pounds 50bn that Mr Clarke predicted in his November Budget.

The Treasury is seeking to hold the line at the spending plans agreed for the next three years of pounds 263bn and pounds 272bn for 1995-96 and 1996-97, but fear that John Major may insist on some loosening of spending restraints to ease the pressure on his embattled Government.

Spending was reduced by the equivalent of 0.5 per cent of gross domestic product last year by restraining public sector pay, curbing the growth in social security, and cuts in defence, housing, transport and other programmes.