Nick Clegg is preparing to veto Chancellor George Osborne's controversial proposal to introduce local pay agreements throughout the public sector.
The Liberal Democrats have become increasingly hostile to the idea, amid growing fears that it would widen the north-south divide and provoke a backlash from voters in the north of England. Mr Osborne has asked the public sector pay review bodies to consider the scope for local agreements on the grounds that the present national bargaining system drives up local wage levels in the private sector.
Although the Treasury denies the change would mean pay cuts, wage levels in some areas outside London and the South East could be frozen in future years.
The move looks certain to provoke a Coalition split when the review groups report next month.
Senior Liberal Democrats are worried that going ahead with the proposal would reinforce voters' concerns that the Government is "out of touch" with ordinary people.
A Lib Dem source told The Independent yesterday: "It would play into all the claims that our opponents make about the Coalition."
Some northern Conservatives are also uneasy about the proposal. The party will almost certainly need to make gains in the North to win an overall majority in 2015 and there are fears that local pay would be an unnecessary barrier.
Guy Opperman, the MP for Hexham and the only Tory MP in the North East, told the Newcastle Journal last week: "I do not believe reducing public sector pay will help stimulate private economic growth."
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