Pay May Reflect Regional Living Costs ; BUSINESS ANALYSIS Londoners Find It Nearly a Fifth More Expensive to Buy Goods and Services, Says ONS

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IT WON'T come as a surprise to any Londoner who has ever needed a plumber, but the cost of living in the capital is up to a fifth higher than in the provinces. Ground-breaking research by the Government's Office for National Statistics confirmed that, as with growth, house prices and employment, there is a deep North-South divide in inflation rates.

A Londoner has to pay almost 8 per cent more than the average Briton for the same basket of goods and services, while a Geordie gets away with a 10 per cent smaller budget - a gulf of 18 percentage points.

A shining example is the notorious case of six City of London investment bankers who racked up pounds 44,000 on wine during a meal in Petrus restaurant to celebrate a deal (the food was thrown in free).

The real villain in the piece is, however, housing where costs in London are 18 per cent higher than the rest of the UK but 37 per cent cheaper in Northern Ireland. This is a cause of much anger in regions especially when, as happened last week, the Bank of England raised interest rates to tackle strength in the housing market.

Catering costs - as the Petrus example highlights - are another divisive issue, with the bill in the capital coming in 12 per cent higher than in the North-east. A pint of beer is likely to cost 15 per cent more. Interestingly, globalisation has kept the prices of goods - everything from food to DVD players - relatively even across the UK. A packet of cigarettes, for example, does not vary more than 2 per cent across the country. London is not always the most expensive. East Anglia has the priciest clothes, while utility bills are highest in the more remote regions of Northern Ireland, Scotland and the West Country.

So far, so interesting - but what does it mean? The significance is that context in which the research was carried out.

Gordon Brown, the Chancellor, commissioned it in this year's Budget as part of a drive to tackle inequalities across British regions. He said the economy needed "to recognise local and regional conditions in pay, such as the extra costs for retention and recruitment that arise in London and the South-east". He went on to warn that remits for pay review bodies and public sector workers, including the civil service, would include a "stronger local and regional dimension". The announcement was greeted with shock and anger by public sector trade unions who accused the Government of proposing different pay levels for different regions.

They threatened to call a national strike if ministers abolished UK-wide pay settlements. Meanwhile, the Treasury has commissioned studies into the feasibility of moving 20,000 civil servants out of London, and into improving statistics on regional economies. Both will be published around next month's pre-Budget Report.

Stephen Bevan, the director of research from the Work Foundation think tank, said it was hardly surprising that unions - and even some regional public sector employers - were perturbed. "These figures will reignite some of the fear that unions and some employers have over local bargaining because it is clear that many managers in the public sector have no experience in pay bargaining," he said. When it was tried in the NHS some years ago the unions, with their greater network, were able to outflank local managers to extract better deals," he said. The same phenomenon occurred in the railways after privatisation where unions exploited the end of national pay bargaining for train drivers to play each of the new 26 operating companies off against each other.

Andrew Oswald, professor of economics at Warwick University, believes the Government should carry out what the unions fear and install local pay bargaining. …