George Osborne will say that public sector employees in poorer parts of the country should have their pay frozen until it is brought into line with local private sector workers.
Mr Osborne originally intended to introduce local pay rates in April 2013, but has decided to bring the plans forward by a year in an attempt to boost growth.
The move is likely to be met with a furious response from unions, which are already threatening industrial action over cuts to pensions.
The Chancellor will publish figures that show that in some parts of England and Wales public sector workers earn almost a fifth more than those in equivalent jobs in the private sector.
The Treasury argues that the pay gap leaves private companies struggling to compete for the best staff against public sector organisations, whose workers also enjoy better pensions and job security.
Officials believe that introducing local pay for public sector workers will make it easier for companies to hire staff and stimulate growth. “George really wants to ‘up’ it on this,” said a Treasury source. “It should help some firms to hire staff in areas where public sector pay is much higher.”
Under current national pay deals, public sector workers performing the same role receive the same salary across England and Wales, with an additional allowance for working in London. Mr Osborne’s reforms will lead to workers outside the South East being paid less.
The plans will initially affect 160,000 civil servants working in Jobcentres, the Driver and Vehicle Licensing Agency and border guards at ports and airports.
However, Mr Osborne will announce plans to roll out local pay rates affecting six million public sector workers — including teachers and hospital staff — from next year.
Officials will begin negotiating local pay deals with most civil servants after they reach the end of a two-year pay freeze in July, with any pay settlements likely to be backdated to February.
The move could result in the pay of public sector workers in some areas being frozen for a number of years.
The Treasury’s analysis highlights the stark difference between public and private sector pay in England and Wales.
In Wales, public sector workers are paid on average 18 per cent more than private sector workers doing the equivalent job. In Yorkshire and the Humber and the East of England the difference is 13 per cent, while in the North East the pay gap is 11 per cent. The difference in the South East is only 0.5 per cent.
The imposition of local pay negotiations will anger unions, which criticised the proposal when it was unveiled in last year’s Autumn Statement.
Brendan Barber, the TUC general secretary, said the move would “suck demand out of local economies, increase joblessness and worsen the North-South divide”.
Members of the Public and Commercial Services Union, which represents civil servants, overwhelmingly rejected the Government’s latest offer on pensions yesterday, setting the stage for a fresh round of industrial action.
Nine out of 10 of those who took part in the ballot rejected the proposals for a new pension scheme. More than seven out of 10 backed continuing the campaign, including further industrial action.
The National Union of Teachers said it was calling a one-day strike in London on March 28 as the next step in its pensions campaign. Mr Osborne, however, is determined to push ahead with the reforms to pay and pensions. The Treasury wants to base the plans on a local-pay system introduced for staff in courts under the previous government.
The Coalition’s plans were backed by the Institute for Fiscal Studies, which said local pay rates would be more “efficient”. However, it warned that local pay rates would need to be carefully implemented because of variations in different occupations. Doctors and dentists will be unaffected.