Osborne plans one-year public sector pay freeze

(Reuters)

A Conservative Government would impose a one-year pay freeze on the majority of public sector workers as part of a package of austerity measures designed to get the state deficit under control, shadow chancellor George Osborne said today.

The Tory proposal goes beyond Chancellor Alistair Darling's call for a salary freeze for the 750,000 highest-paid public servants.

Under Mr Osborne's plans, only the one million earning less than £18,000 would get a rise, with military personnel on active service overseas being compensated by doubling their operational allowance to £4,800.

Mr Osborne said that the freeze would reduce Government spending by £3.2bn a year and save the equivalent of more than 100,000 public sector jobs.

He also confirmed plans to bring forward to 2016 the date when the retirement age for men will be raised from 65 to 66, saving £13 billion a year.

And he said he would stop paying tax credits to households with incomes over £50,000 by introducing a means test on Child Tax Credit at a lower threshold, saving £400m a year.

In his keynote speech to the Conservative conference in Manchester, Mr Osborne also said the Government should stop new spending on Child Trust Funds for better-off families, continuing payments only to the poorest third and the disabled.

And he called for a £50,000 cap on taxpayer-funded public sector pensions claimed by senior civil servants, local council executives and quango chiefs, potentially saving hundreds of millions of pounds in the coming decade.

Across Government, there should be a reduction of at least one-third in the cost of Whitehall bureaucracy and quangos, saving £3 billion a year by the end of the Parliament.

Mr Osborne said that cuts identified by the Conservatives would save at least £7bn a year on top of the £13bn which he believes he can raise by putting men's retirement age up to 66.

Tories have said they oppose the Government's plan for a 50p top rate of income tax from 2011, but have not promised to reverse it.

Mr Osborne today said that the new top rate for people earning over £150,000 would stay in place for at least as long as the public sector pay freeze, to show that the richest in society are sharing the burden of bringing down the record £175bn state deficit.

He warned bankers that the Tories reserved the right to "take further action" - possibly including tax hikes - if new international rules on bonuses fail to work.

"We believe in the free market, not a free ride," he warned.

Mr Osborne acknowledged that his proposals would impose burdens on many voters, but insisted that they would be spread across society, repeating several times: "We are all in this together."

He repeated Tory promises of a 5 per cent cut in ministers' pay and a freeze for the period of the next Parliament, along with a 10 per cent cut in the number of MPs, to show that Westminster was taking its share of the pain.

And he said that as Chancellor he would insist on a personal veto on any proposal to pay an individual public servant more than the salary earned by the Prime Minister - currently around £198,000. To laughter, he added: "I am not expecting a long queue."

Britain was "sinking in a sea of debt" and was facing the "terrible consequences of excessive borrowing by Government, the banks and consumers", said Mr Osborne.

He warned that failure to bring down the deficit swiftly would threaten Britain's future prosperity.

"You cannot have a sustained recovery until you show the world that Britain can pay its way," warned Mr Osborne.

"And let me tell you, the world is watching Britain at the moment. It is casting doubt on our country's creditworthiness. It is questioning our resolve to deal with our debts.

"And when that starts to happen, then long term interest rates rise, and international investment dries up, and businesses fail, and unemployment rises still further, and the recovery is killed stone dead.

"We saw it the last time a Labour Government ran out of money. And we must never allow our country to be dragged there again."

Mr Osborne accused Prime Minister Gordon Brown of "going shopping on Brighton pier with the nation's credit card" by promising new spending at Labour's conference last week.

"The Iron Chancellor has turned into the plastic Prime Minister," he said.

"Free social care. Free hospital parking. Free childcare places. We would all like those things. But where is the money coming from?

"He is treating the British people like fools."

And he rejected Labour's argument that voters at the election expected in the spring would be faced with a choice between careful spending reductions by the Government and savage cuts in services from the Tories.

"The Prime Minister told Parliament week after week that the choice was now 'investment versus cuts'," said Mr Osborne.

"But the public realised the choice wasn't cuts versus investment. It was reality versus fantasy. Prudence versus profligacy. Truth versus lies.

"Never has a government's economic position collapsed more comprehensively in the face of an opposition's argument. We made the right call."

The real dividing line in British politics was between "progressive Conservative reform and Labour frontline cuts", he said.

Mr Osborne said that the Chancellor's pay freeze for top public servants would affect less than one-fifth of the public sector workforce.

Whoever wins the next election will have to impose a much wider freeze, he said, though he added that those earning less than £18,000 would be exempted from the measure under the Tories.

"I know it is difficult to ask such hard working people to accept this freeze," said Mr Osborne.

"But I want to be straight with you. A pay freeze of the scale I'm talking about is the equivalent to saving 100,000 public sector jobs.

"And I say to every public sector worker it is the best way to try to protect your job during this difficult period."

In a warning to bankers that they might face tougher sanctions if they allow the bonus culture to run out of control once more, Mr Osborne said: "The support from the taxpayer when you needed it most was there to prop up your banks not your bank accounts. Don't forget that.

"I hope the new international rules work. It is the best solution. But if we find the money that should be going into stronger bank balance sheets is being unreasonably diverted into bigger pay and bonuses - we reserve the right to take further action and that includes using the tax system.

"I have given you a fair warning. for I believe in the free market not a free ride."

Tories did not want the 50p top rate of income tax to become "a permanent feature of the tax system", but could not think of abolishing it while the public sector pay freeze remains in place.

Mr Osborne stuck by his promise to raise inheritance tax thresholds to £1 million during the lifetime of the next Parliament, which has been attacked by Labour as a tax break for millionaires.

He said that the change would help create "a savers' society". And he said that in the longer term he would also seek to reverse the "pensions tax raid" imposed by Mr Brown as Chancellor when Labour first came to power.

In order to help pay for restoring the link between the state pension and average pay, Mr Osborne confirmed he would commission a review to raise the state retirement age from 65 to 66 in 2016, rather than 2026 as the Government plans. Tories calculate that this could save the state £130 billion over a decade.

"The women's pension age is already set to start rising over the next decade to 65. And by 2026 the pension age for men and women will reach 66," he said.

"This is already happening. But most experts - including Lord Turner who made this recommendation - now think that is too far off. So we will hold the review which Turner's Report itself proposed and which this government has never held.

"Our aim will be to bring forward the date when the pension age rises... For men this means the pension age will not start to rise to 66 until at least 2016. For women this means the pension age will not start to rise from 65 to 66 until at least 2020.

"No one who is a pensioner today, or approaching retirement soon, will be affected. But this is how we can afford increasing the basic state pension for all."

Mr Osborne acknowledged that his changes would be tough for many voters.

But he insisted: "These are the honest choices in the world in which we live and we have made them today.

"Anyone who tells you these choices can be avoided is not telling you the truth."