Tories question public sector pay deals

The shadow chancellor has said the Conservatives would consider reopening existing public sector pay deals.

George Osborne told the BBC on Monday that he was facing "difficult decisions" on public sector pay.

But he warned: "The age of excess is over and we need an age of restraint and responsibility."

"I think we need to look at these three-year pay deals that the government came up with because they may be very inflexible at a time when of course the economic conditions are changing very quickly," he added.

"We have set an example by saying that the very high salaries you get in the public sector, it's difficult to justify them going forward and that anyone in a quango who is paying themselves more than the prime minister, it's going to be very difficult to justify that to the Treasury."

Osborne's call came on the same day that the Institute for Fiscal Studies published a report which warned that a government budget deficit of around five per cent of national income needs to be addressed.

The IFS said that taxes will have to rise by £20bn a year, and possibly far more, to fund the shortfall in the nation's finances.

Whoever becomes chancellor after the next election may have to raise tax or cut spending by about £1,250 per family per year, according to the IFS estimates.

That would be in addition to the measures already set out by the chancellor in the pre-Budget report last year.

The warnings came as Monday's newspapers focused on the problems facing Alistair darling as he prepares for the April 22 Budget.

The Times says he is preparing to forecast that the economy will contract by between 2.5 per cent and three per cent this year, the worst performance since World War Two.

And the Telegraph examines the likelihood that taxes will have to rise, predicting that an increase in VAT could accompany the new 45 pence higher rate of income tax and the rise in national insurance already announced.

Robert Chote, director of the IFS, told the BBC that the fiscal challenge for the next government will amount to 2.7 per cent of national income.

"That means that the government needs to be raising about £40bn a year by the end of 2015/16," Chote explained.

"That is £40bn in today's terms, by some combination of tax increases and cuts in the public spending plan."

Responding for the Conservatives, Osborne warned that he had not ruled out further tax rises.

In an interview with BBC Radio 4's Today programme, the shadow chancellor said that the Conservatives would be looking for more "restraint" from Whitehall if they form a government after the next election.

"I haven't ruled out further tax rises although I will work hard to avoid them," he said.

"I think that where the bulk of the strain that needs to be born is on spending restraint.

"Where I will be looking for restraint, if I were the chancellor after the next election, is on spending."

He said that the Tories would look to "immediate action" such as reducing the overhead costs of government and ensuring that pay settlements reflect the economy.

But Osborne also stressed the importance of long term changes, including reducing "the big drivers" in public expenditure rises such as family breakdown, poverty, welfare dependency and poor education.

"We are also looking at changing the culture of Whitehall so we create incentives to save money from Whitehall," he said.

"Looking at the procurement of IT programmes, which cost billions of pounds and again there is room for saving there.

"I want to make sure that the day after the general election we are ready to govern and we are ready to deal with the very, very substantial problem we are going to find with public finances."

Osborne said the figures from the IFS were "extremely helpful" because the government does not currently provide them publicly.

He pledged that a Conservative administration would establish an independent Office for Budgetary Responsibility to deal with such forecasts.

"We don't know whether we have lost very substantial amounts of money on the bank rescue," he noted.

"Gordon Brown keeps reassuring us that we haven't. We don't know still the length of this recession."

The shadow chancellor continued: "But we do know certain things. We know that we came into this recession with around a three per cent budget deficit.

"And we know that we have added to the borrowing problems with discretionary fiscal stimulus and hopefully thanks to the combined intervention of the Conservative Party, the Bank of England and potentially Alistair Darling behind the scenes, we might be able to prevent a second fiscal stimulus."