Brown tells public sector to expect 2% pay increases

British finance minister Gordon Brown warned public sector workers yesterday not to expect inflationary pay rises and said he would not relax fiscal discipline.

Bank of England policymakers also said earlier they were closely watching the upcoming annual January wage-bargaining round for signs that high oil prices were spilling over into pay demands, as that could necessitate interest rate rises.

In a speech to business leaders in London, Mr Brown said half of the recent rise in inflation was because of oil prices and that government workers should be ready to accept 2 per cent increases - the same as the central bank's inflation target.

"There will be no taking risks with inflation, no let-up in our demand for restraint in wage settlements . . . and at all times, fiscal discipline and no relaxation of our fiscal grip," he said.

His comments are likely to anger public sector unions, traditionally supporters of Mr Brown's ruling Labour party, at a time when he looks closer than ever to succeed UK prime minister Tony Blair.

But Mr Brown said the public sector had to play its part.

"I can confirm when tackling all long-term pressures from pensions and welfare to the public services, we will spend only what we can afford, maintain all our fiscal disciplines, consistently meeting our fiscal rules," he said.

Mr Brown is due to publish new borrowing and economic growth forecasts in the annual pre-budget report on December 5th. He also flagged the services sector - which accounts for about two-thirds of the British economy - as key in keeping inflation in check.

"As services are provided mainly by local labour, inflation pressures come primarily from wages," he said.

"Britain is better placed to address any inflationary risk, by continuing to extend competition across the services and exercising control from the public sector outwards on pay pressure and, overall, by maintaining a flexible labour market."