Brown puts squeeze on pay and spending

Labour conference - Chancellor to warn unions and party rebels

Gordon Brown will deliver an uncompromising warning to trade unions and Labour rebels tomorrow that he will not relax his discipline and expand public spending.

Raising fears that he is planning a tight squeeze on the pay of over a million public sector workers, the Chancellor of the Exchequer will tell Labour's conference in Brighton that public spending must be kept within the tight targets he has set.

He will tell the conference that Britain faces "challenging times" and that "no country can isolate itself from global events". Mr Brown has already been warned by the MSF (the manufacturing, science and finance workers' union) that at least 100,000 manufacturing jobs will be axed before Christmas unless interest rates are cut.

The Chancellor warned cabinet colleagues last week that he would veto additional bids for cash that were not covered by Labour's election pledges.

Mr Brown's iron grip on spending is already leading to tensions with cabinet colleagues. Some senior ministers say he will have to relax his spending constraints to avoid worsening the coming recession.

Tony Blair underlined his anxieties about the need to deliver on Labour's election promises for better public services at a dinner last week with his key ministers, including Stephen Byers, the Transport Secretary, Estelle Morris, the Education Secretary, and Alan Milburn, the Health Secretary.

One cabinet minister who was there said: "It's going to be very tight." Schools, health and transport – Labour's election priorities – will be protected, but bids for extra cash, including inflation-busting pay rises, will be resisted.

Doctors' leaders are worried that the cuts may affect a new contract for GPs that is still under negotiation. Some groups, such as nurses and the armed forces, who are needed for the war on terrorism are likely to be given special treatment, but others could see their pay increases cut and paid in two stages next year to lower the cost.

Mr Brown told the Cabinet that most of his reserves were used up in compensation for foot and mouth disease, which is expected to top £3bn, and other emergencies including the crisis on the railways after the Hatfield crash and military operations in Sierra Leone. Now more will be needed to pay for the war on terrorism.

Mr Byers will lead the Cabinet's counterattack tomorrow against the union backlash over private sector finance for hospitals and schools.

Addressing a conference rally, Mr Byers will accuse grassroots opponents of "dangerous self-indulgence" in opposing change in the public services, saying they are "resisting change at all cost". And he will warn: "It is in this approach that dangers lie. It reflects almost exactly what took place in the late 1970s. We know what happened then.''

Alan Simpson, the treasurer of the Campaign Group of left-wing Labour MPs, called on the Chancellor to increase spending in his pre-budget report."We should be increasing spending on special schemes and raising the money through a bond issue to avoid recession getting worse," he said.

Opposition to PPP and the US "son of star wars" system has been muted by the terrorism crisis, but some trade unionists and activists claim Downing Street has adopted a "deliberate strategy'' of silencing dissent.

A spokesman for the GMB general workers union said: "Some of the privatisation freaks in Downing Street are trying to use the war on terrorism as cover for waging a war on the unions.

''The last thing the nation wants is the spectacle of ministers and the Labour movement going at it hammer and tongs. It is important that we get through the coming week without division. And to achieve that the Prime Minister has got to call his attack dogs to heel.''