George Osborne will use his Budget on Wednesday to announce a further squeeze on public sector spending and pay to shore up government finances and provide some money for his pet projects.

Changes to the state pension announced at the weekend will bring the exchequer a stealth windfall of almost £6bn a year from 2016-17, mostly paid by public sector employers and employees in the form of increased national insurance contributions.

By banking much of the money generated, the chancellor will be able to challenge Labour to match his tough attitude to public sector workers or face a further black hole in the public finances.

Officials have indicated Mr Osborne will bank £3.3bn, more than half the windfall, with the remaining £2.2bn used to fund projects such as the Dilnot proposals on social care and other Treasury initiatives.

Mr Osborne’s windfall will come from the small print of the plan to introduce a single-tier pension at a minimum of £144 a week in 2016-17.

The chancellor said on Sunday the new pension would be a “huge boost” for pensioners but did not add that associated changes would see steep rises in national insurance bills  Read more

The chancellor has drawn up plans to find fresh savings from the public sector payroll by ending the historic system of “pay progression” enjoyed by millions of workers.

Teachers, NHS workers, police and civil servants in six departments currently enjoy regular pay rises along a sliding scale for their pay grade, so long as they meet career appraisals.

That explains why public sector pay has continued to rise despite a headline “freeze” to salaries since 2010.

But the Treasury has just set out new plans for departments to propose an end to “automatic time-served progression” as a way to save costs in the 2015-16 spending review, scheduled for June. Those changes would apply to the six departments which still Read more