Nick Clegg is preparing to veto Chancellor George Osborne's controversial proposal to introduce local pay agreements throughout the public sector.

The Liberal Democrats have become increasingly hostile to the idea, amid growing fears that it would widen the north-south divide and provoke a backlash from voters in the north of England. Mr Osborne has asked the public sector pay review bodies to consider the scope for local agreements on the grounds that the present national bargaining system drives up local wage levels in the private sector.

Although the Treasury denies the change would mean pay cuts, wage levels in some areas outside London and the South East could be frozen in future years.

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