The government's multi-billion pound investment in hospitals, schools and transport is being undermined by pay rises and extra bureaucracy, official statistics have indicated.

According to figures from the Office for National Statistics, public spending rose by 7.9 per cent in the fourth quarter of last year compared with the same three months the year before.

But the real increase, after public sector inflation caused by higher wages and costs is taken into account, was just 2.3 per cent.

This suggests 70 per cent of the extra cash is going towards spiralling salary and administrative costs, the Telegraph reports.

"Labour is taking and spending and failing," said shadow chancellor Michael Howard.