The Government has sparked a fresh row with unions after confirming plans to press ahead with regional pay rates in the public sector.
Chancellor George Osborne told MPs he wanted to make public sector pay more "responsive" to local pay rates, saying the idea was first introduced into the court service by the previous Labour government.
London weighting already existed across the public sector, and the Opposition have proposed the "interesting idea" of regional benefit rates, he said.
"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 in all parts of the country.
"Some departments will have the option of moving to more local pay for those civil servants whose pay freezes end this year."
Unions immediately attacked the announcement, warning it would drive down wages in the poorest areas of the country.
The TUC said a 1% reduction in public sector wages would hit local economies by at least £1.7 billion a year.
TUC general secretary Brendan Barber said: "It's not public sector pay rates that are stopping the private sector from creating jobs - it's our stagnating economy, a lack of money being lent by the banks for firms to invest, and consumers who are too worried about losing their jobs to spend.
"Picking the pockets of public servants outside London and the South East by localising pay will simply widen the North-South divide, and cause more businesses to fail by taking even more money out of local economies, at a time when they need all the help they can get.
"Pay rates for teachers and nurses should be based on their skills and the jobs that they do, not on the areas in which they happen to live and work.
"Local pay risks complex, costly and inefficient pay setting for public sector employers, regional skills shortages as public servants opt to work in areas where pay rates are higher, and a long-term future of pay falling behind for workers outside London and the South East."
Dai Hudd, deputy general secretary of the Prospect union, said: "This ill-thought through policy advocates holding down pay in certain areas of the country, based on the flawed economic logic that it will encourage local enterprise.
"The Cabinet Office should be ashamed to have produced such poor quality evidence in support of a policy that has devastating implications for large parts of the UK and their local economies."
Prospect said the hardest hit region would be Wales, where there is said to be a public sector pay premium of a "staggering" 18%.
Simon Walker, director general of the Institute of Directors, said: "Moving from national pay scales to regional pay rates is simply about recognising economic reality.
"In the private sector, wages vary across the country due to varying costs of living, so doing the same in public sector salaries is a fair and reasonable change to make.
"Many of our members find artificially inflated public sector wages are crowding them out of the recruitment market, preventing private sector growth.
"The Government must save money - adopting regional pay rates allows them to do so and move to a system of greater equality between sectors at the same time."
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