Scrapping national pay bargaining in the public sector would save more than £6 billion a year that should be used to create hundreds of thousands of new jobs, an influential think-tank has urged.

Nationally-set pay bands mean that the average public sector worker is paid 7% more than their private sector counterparts - rising to almost 14% when pensions are taken into account - according to a report published today by the right-of-centre Policy Exchange.

That public sector “premium” is as high as 25% in some parts of the country, it said.

The think-tank called for public sector pay levels to be brought into line with their local private sector equivalents - saving £6.3 billion that could be spent tackling local unemployment and creating 288,000 jobs.

Chancellor George Osborne raised the prospect of local pay agreements in the Budget in March, but there have been coalition concerns about the idea and signs that the Government is backing away from the move. In its report - entitled Local pay, local growth - Policy Exchange argued that the current system was unfair to public sector workers in areas with higher costs of living, prevented schools and hospitals in those areas from attracting the best staff, and wasted public money that could be used to help lift the economy out of recession.

Savings from a move to locally-agreed pay should be ring-fenced to fund additional public expenditure in the areas affected.

Matthew Oakley, co-author of the report and a former Treasury adviser, said: “The current system of national pay bargaining is bad for the economy and bad for public services. Regional pay bargaining is not the answer.

“Moving to a system where local public sector employers can decide how to negotiate salaries with employees will enable top performing public sector workers to be paid more, increasing productivity and improving public services.

“Our proposals would mean that not a single penny would leave poorer regions. All the money would be ploughed back into reducing unemployment and boosting growth in the poorest parts of the country.”

Tom Sandford, director of the Royal College of Nursing (RCN) England, dismissed “the notion that moving to local pay in the NHS would somehow save the economy”.

“There is no evidence that, if the NHS cuts nurses’ pay, the private sector would automatically create other jobs. These proposals would just entrench low pay in the most economically deprived areas,” he said.

“Nurses are in the middle of a two year pay freeze, facing an attack on their pensions, and suffering huge pressures at work because of cuts to jobs and services.

“This is a cynical attack on hard working nurses, targeting some of our most important public sector workers to solve a crisis which was not of their making.”

A Treasury spokesman said: “As the Chancellor set out in the 2011 Autumn Statement, there is a case for considering how public sector pay could better reflect local labour markets.

“In line with the usual process the Government is considering the independent Pay Review Bodies’ reports and will publish and respond in the Autumn. Nothing has yet been decided.”