June 20, 2010 5:52 pm

Osborne paves way for public sector levy

George Osborne on Sunday paved the way to impose a multibillion pound levy on 6m public sector workers, as he commissioned a former Labour cabinet minister to find immediate savings from the state’s pension bill.

The chancellor co-opted John Hutton, the Blairite former work and pensions secretary, to lead a review into “unsustainable” public sector pensions, in a move senior Labour figures dismissed as putting up a “human shield” for cuts.

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Mr Hutton’s interim report in September will explore options to “contribute to the reduction of the structural deficit” over the next three years, a remit that makes a squeeze on public sector pay likely.

As Mr Osborne has pledged to protect accrued rights – in effect ruling out a cut in current pension payments – it leaves the commission little choice but to recommend raising the employee contribution rate in order to significantly cut costs before 2014.

“The public sector pension bill is unsustainable ... we do have to tackle it,” Mr Osborne told the BBC, adding that it would be done in a “fair and equitable” way.

A rise in contributions for nurses, teachers and civil servants would cut the public sector pay bill, mirroring measures in Ireland’s deficit reduction plan. But it is likely to be opposed by unions, setting the stage for winter walkouts.

While rates may vary according to income and profession, it is estimated a 2.5 per cent average increase in contributions would raise £3.2bn, through what is in effect a pay cut.

Mr Hutton’s review is likely to be adopted in the autumn spending review, but Treasury insiders do not rule out pension measures in Tuesday’s Budget. Any changes to contributions will come on top of a public sector pay freeze.

Reforms to put the public sector pension liabilities on an “affordable and sustainable” footing will be proposed in the final report from the commission, ahead of the 2011 Budget.

Scaling back entitlements will put the government on a collision course with unions. Dave Prentis, leader of Unison, the biggest health service union, recently warned that ministers “won’t know what has hit them” if they attempt pension reforms.

Labour figures reacted angrily to Mr Hutton’s decision to chair the commission.

“They’ve made themselves human shields for the most savage and heartless Tory policies in 20 years,” said Lord Prescott, former deputy prime minister.

The Treasury on Sunday laid out stark statistics on the costs of public sector pensions, in the latest step in a coalition-wide effort to soften public opinion for a drive to bear down on costs.

The total cost of unfunded public sector schemes is £25.4bn in 2010/11 and the independent Office for Budget Responsibility last week disclosed that the gap between contributions and pensions in payment is expected to double from £4bn to £9bn over the next four years.

The average state contribution rate is 18 per cent, compared with a 10 per cent private sector average among the third of employees that still receive a contribution from employers.

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