Chancellor George Osborne is to bring forward plans to allow some government departments to set pay locally for their staff, a move that could lead to further strike action by unions angry over sweeping public sector pension reforms.

According to a Treasury source, Osborne will give the go-ahead in his March 21 budget for the Department for Work and Pensions, Home Office and Department for Transport to introduce local pay settlements from April this year. That is one year earlier than originally announced in November.

The move is part of the Conservative-Liberal Democrat coalition government's austerity drive, aimed at eliminating a budget deficit that was a record 11 percent of economic output when it came to power two years ago.

The Public and Commercial Services union, Britain's biggest civil service union, slammed the plans as cruel and counter-productive and said they would hit the poorest areas of the country hardest.

Local economies ... are crying out for investment, not more cuts, said PCS general secretary Mark Serwotka.

The PCS voted this week to continue campaigning against government plans to increase pension contributions and raise the retirement age to 68, paving the way for more industrial action.

Last November, hundreds of thousands of public sector workers went on strike over the pension issue in the biggest walkout seen in Britain for a generation.

Critics of local pay-setting argue the system could end up being more bureaucratic and more costly to the taxpayer as neighbouring regions compete to attract staff.

You (could) end up with a spiralling increase in public sector pay, deputy leader of the opposition Labour party Harriet Harman told Sky News. What's better is to have proper planning and proper negotiated pay.

A report to be published alongside the budget is expected to show that public sector workers earn about 8 percent more on average than their counterparts in the private sector, according to the Treasury source.

But there are strong regional differences: state employees in south-east England earn 0.5 percent more, while in Wales their wages are 18 percent higher than in the private sector.

Liberal Democrat business minister Vince Cable said it was right to make public sector pay more flexible.

What we're trying to do is to make sure that throughout the public sector there's more genuine decision-making at a local level, and you have to take into account pay and conditions, he told BBC radio on Saturday.

But it has got to be done very carefully.

(Additional reporting by Michael Holden; Editing by Catherine Evans)