Resisting union pay demands for public service workers will be a "crucial test" for Labour's second term in power, says former cabinet minister Peter Mandelson.

The former trade secretary and confidante of Tony Blair said "pent-up wage frustration", fuelled by Labour's landslide victories, had helped change the "shop floor mood".

Unions, of course, should press their point of view - but not to the point of self-destructiveness

Peter Mandelson

Local council workers this week suspended plans for more strikes after talks produced a new pay deal offer.

Delivering a warning to unions wanting to change government policy, Mr Mandelson argues low-paid public service workers do need help but the priority for taxpayers is better services.

Revitalise

Trade union pay negotiators say giving staff a better deal is the way to improve services.

Talk of a return to union militancy is premature, says Mr Mandelson, although a few "hard-left" figures have triumphed in recent union elections.

The Hartlepool MP agrees that public service wages, particularly for women, need to rise as part of moves to revitalise those services.

Peter Mandelson says the Labour-union link must change

But he writes in the Financial Times newspaper: "The government cannot cave in to public sector wage pressure, whether or not this enjoys popular support.

"This challenge will be a crucial test for the government during this Parliament."

Trade unions still control 49% of the votes at Labour's annual conference.

Labour links

That is a link Mr Mandelson says he wants reformed, not broken.

"The future strength of the Labour-union link depends on the unions acting on a shared understanding that they cannot abuse their privileged place within Labour's constitution by using their votes to coerce the government or manipulate its policies," he says.

As well as resisting wage pressure, ministers need also to show their mettle on calls for more employment laws and opposition to public service reform, argues the ex-minister.

John Monks has lacked the support he deserves, says Mandelson

Employment rights have been comprehensively increased and the government should continue its cautious stance to further reform.

The latest pay two-year pay offer for council staff is now being put to both sides in the dispute.

Mr Mandelson's intervention prompted the GMB union to voice its continued frustration with government talk of change.

A GMB spokeswoman told BBC News Online: "Public service workers are tired with the government's mantra of 'reform, reform, modernise' when that's exactly what we have been doing.

"It needs to go hand-in-hand with a recognition of the hard work and contribution public service workers make in our communities every day."

Blocked

Concerns over plans to extend the role of private companies in public services are another likely flashpoint at this autumn's TUC and Labour conferences.

Health Secretary Alan Milburn apparently wants to hand control of some hospitals to public interest companies run by trusts or voluntary groups, universities or private firms.

That proposal is reported to have been so far blocked by Chancellor Gordon Brown.

Mr Milburn said there was a choice between "consolidation" of previous changes or the kind of "transformation" he wanted to see in public services.

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That language was clearly echoed in Mr Mandelson's article as he argues greater diversity and choice in the way public services are delivered can bring improvements.

"Unions, of course, should press their point of view - but not to the point of self-destructiveness," says Mr Mandelson.

"If Labour is forced to consolidate rather than transform the performance of public services, the electorate will turn to a Conservative alternative that does not believe in them at all."

The MP criticises the unions for being too reliant on public service members when they needed to focus more on service sectors and new entrepreneurs.

Barely a single union leader had lifted a finger to help TUC general secretary John Monks achieve this shift, he adds.