Osborne's regional pay plans under fire

Academics specialising in regional development said the government's plan to end national pay bargaining would "reduce spending power, undermine many small and medium-sized businesses in areas of low pay and aggravate geographical, economic and social inequalities" in a letter to the Times newspaper.

Professor Keith Shaw of Northumbria University warned that Mr Osborne's proposals will reduce public-sector pay in regions outside of London and the south-east.

He added that areas such as the north-east could suffer from a "spiral of decline" that would widen the ever-growing north-south divide.

Labour's shadow chief secretary to the treasury Rachel Reeves MP said that regional pay "would divide north against south, public sector against private, dedicated care workers against struggling small businesses."

"Ploughing on with this plan will prove economically damaging and socially divisive - yet another demonstration that the Tories cannot deliver the change that Britain needs," she added.

TUC general secretary Brendan Barber said the academics' warning was more evidence that regional pay plans "are not just unfair but ill-thought out.

"The Chancellor should take the views of these many academic experts seriously and put a stop for once and for all to these flawed and counterproductive proposals," he added.

And a spokesman for small businesses in Newcastle and Northumbria - where workers would be among the hardest hit by regional pay - said he opposed the plans although his federation didn't have an official position.

The academics' claims come a day after research by accountants KPMG showed already ingrained regional differences in pay are having a negative impact on local economies.

One in five workers earning less than the living wage - most of whom live in the north of England, the north of Ireland and Wales - are half as likely to make "major purchases," KPMG's report showed.