Analysis
By Simon Blake BBC social affairs analyst

The firefighters' dispute could be just the opening battle in a full-scale war between the government and trade unions on public sector wages.

Ministers say that all Gordon Brown's millions for public services must not be swallowed up in wage increases - extra cash has to mean modernisation.

I don't think they're achieving a lot of modernisation Andrew Oswald Warwick University

But their metal is about to be tested.

A deal for NHS staff has just been tabled that could prove controversial.

The teachers' review body reports next April on its plans.

And this will occur against the backdrop of a bruising series of disputes over cost-of-living allowances in the South East.

Can the government get the unions on-side whilst avoiding inflation-busting increases?

Out of control?

There are already signs that wage settlements in the public sector are running out of control.

Pay deals in the pipeline

Firefighters NHS Teachers South East living allowances

According to the pay monitoring body, Incomes Data Services, there are currently 26 long-term deals on pay, most of which give average increases of 15% to 23% over three years.

Ironically, this includes an unconditional 17% over two-years for ACAS staff, the professional negotiators who are helping broker a deal between the Fire Brigades Union and local government employers.

The IDS' Alistair Hatchett says the two-year 16% deal for the firefighters vetoed by the government was "not exceptional" in its generosity.

Treasury fears

The numbers certainly look worrying for the Treasury.

Data for the last six months shows a 5.2% increase in public sector earnings, with many of the biggest deals like a two-year 7.8% settlement for England and Wales's 1.3 million council workers yet to take effect.

Martin McMahon, at economists Lombard Street Research, agrees: "It does seem at the moment that a lot of public spending is being absorbed in higher wages."

So what is the government getting in return?

Mr Hatchett points out that the ACAS deal was about ending discrimination against women getting unequal pay - not yet an issue in a fire service given that most staff are male.

Reform links

The government argues that deals are normally also linked to reform, such as a three-year proposal recently tabled for the NHS.

If backed by the million plus affected nurses, therapists, porters and ambulance workers, this will give an average 12.5% increase but only in return for more flexibility on when they work and what they do.

Andrew Oswald, Professor of Economics at Warwick University, is sceptical about what the government is getting in return.

[The government should] throw national wage scales into the Thames and not dredge them up Andrew Oswald Warwick University

"I don't think they're achieving a lot of modernisation. Money is mainly going in to catch-up with the private sector."

The government's critics argue that deals have been about simplifying pay systems and pre-empting possible equal pay claims, rather than giving managers more leeway to change the way that work is done.

The NHS deal replaces 650 pay scales and grades with a core set of terms and conditions.

It should reduce barriers between different groups of workers by making it easier for nurses to do some prescribing and care assistants to take on some nursing duties.

But it remains unclear how much difference these freedoms will make, given the scale of the problems - especially staff recruitment and retention - faced by the NHS.

Local wage rates

For Professor Oswald, the underlying problem causing staff shortages is that wages don't reflect local costs because pay has to be agreed nationally.

Simmering discontent about house prices in the South East has led to a series of industrial disputes in London - with council workers, teachers and firefighters going on strike for higher allowances.

Though government has moved towards more localised pay - for instance in new foundation hospitals - it needs to do more to "siphon money into the South East".

He recommends that it "throws national wage scales in the Thames and doesn't dredge them up".

Limited room for change

But the government has limited room for manoeuvre.

Unions argue that genuine localism would trigger its own pay explosion as services compete for staff in short supply.

And worker opposition to pay deals already on the table has been hard to overcome.

Some of the key unions representing other NHS workers are still undecided on whether to back their proposed deal.

Despite the two-year settlement for local government staff, wider discussions on simplification of pay structures are proving tricky.

All in all, pay-for-modernisation is proving easier to say than it is to put in to practice.