Chancellor George Osborne has abandoned plans to introduce regional pay in the NHS. However, he accepted the NHS Pay Review Body’s call for the Agenda for Change pay framework to be altered in order “to meet the challenges and cost pressures in the NHS.”

The review body has also recommended a “fundamental review of higher cost area zones” which see staff working predominantly in London and the South East paid more.

The decision to retain national pay bargaining is a major victory for health unions and Liberal Democrats who had opposed the introduction of regional pay when it was mooted in March this year.

The Department of Health had wanted to see the introduction of what it called “market facing pay”, with an increased number of higher cost area zones within the existing Agenda for Change framework.

In its evidence to the pay review body in April, the DH had suggested a new higher pay zone covering outer London and much of the south, including most of the home counties, Hampshire and the Bristol area.

A second option would include this area plus parts of the Midlands including Warwickshire, Leicestershire, Nottingham and Derbyshire, as well as areas in and around Manchester and Leeds.

This would have been funded by holding down pay elsewhere.

In his autumn statement Mr Osborne said: “The government has today published the reports of the independent pay review bodies on local pay and intends to accept their recommendations, including that there should be no new centrally determined local pay rates or zones but that there should be greater use of existing flexibilities.”

In its report to ministers, published alongside the autumn statement, the pay review body said it supports the idea of market facing pay to “support recruitment and retention of good quality staff to deliver patient care” and to “make more effective and efficient use of NHS funds”.

But it rejected the government’s claim that public sector pay was damaging the private sector.

It said: “Our view is that there has yet to be hard evidence that a positive public sector pay differential is crowding out the private sector and hurting business.”

The body concluded there was no “firm evidence…to justify further additional market-facing pay in the NHS at this time, although further development of AfC is needed to meet the challenges and cost pressures in the NHS”.

It supported Agenda for Change as the “appropriate vehicle” but said a regular review of the framework and its flexibilities was needed with negotiations “brought to a conclusion at a reasonable pace”.

It added NHS trusts “should have transparent pay and reward policies which clearly state their approach to the use of AfC flexibilities”.