Chancellor Gordon Brown has warned firefighters that the UK will not return to the "bad old inflationary days of the mid-1970s" by allowing large public sector pay increases.

There is no future for Britain in going back to the bad old inflationary days of both the mid-1970s and late-1980s

Gordon Brown

He told the CBI annual conference in Manchester that any substantial pay increases had to be justified by productivity increases.

Speaking two days before his pre-Budget report, Mr Brown signalled he would increase borrowing rather than slash public spending.

He said the government would "remain vigilant both about global risks and domestic risks in the housing market and in pay, public and private".

He's probably one of the best of a bad lot.

Graham Sutherland, MD, Power Showers

But in a pointed warning to the firefighters he added: "There is no future for Britain in going back to the bad old inflationary days of both the mid-1970s and late-1980s inflationary and unaffordable pay settlements, whether in the private sector or in the public sector... which so damaged economic stability."

Return to talks

He added: "It is because, as the Deputy Prime Minister John Prescott rightly said yesterday, we are resolved to ensure stability throughout the economy, to keep interest rates low and stable, and to secure reform in our public services, that public sector pay rises must be set at a sustainable rate and justified by productivity

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"I urge the local authorities and firefighters to return to talks linking pay to productivity."

On the general economy, he dismissed the suggestion that he should cut spending rather than increase borrowing as the economy slows down.

"In my view, the consequences of such a short-termist and deflationary approach would be higher unemployment, depressed demand and low growth," Mr Brown said.

Taxing pensions

The business audience applauded him for saying he would not take any risks with stability.

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"It was pretty sound stuff," Richard Greenhalgh, chairman of Unilever UK, told BBC News Online.

But, like other business leaders, he was not convinced by the chancellor's insistence that there would be no more tax rises for business.

"I hope he avoids raising taxes, especially for business."

Mr Greenhalgh said he was encouraged by promises to reduce regulation.

But he was still very concerned about the pension situation and particularly a move to tax pension lump sums.

Tax increase 'was right'

Graham Sutherland, managing director of Power Showers, a small company in North West England, was also unconvinced by the tax pledge.

But he said the chancellor was predictably reassuring.

"He's probably one of the best of a bad lot."

Neil Smith, managing director of engineering and manufacturing recruitment company Kinetic, was also impressed by Gordon Brown's performance.

He applauded the commitment to reform corporation tax, to reduce bureaucracy and to encourage free trade.

Before the chancellor arrived at the conference the CBI made clear its anger about the increase in national insurance announced in the last Budget.

Mr Brown said he understood that businesses were worried about the increase in national insurance but he insisted: "I think it was the right thing to do."