John Pienaar reports

Chancellor Gordon Brown has slapped down union demands for 3% annual increases in public spending.

Francis Maude: Labour is 'breaking promises on financial prudence'

In a robust speech to businessmen in London, he insisted the government would stick firmly to the Tories' spending limits for the rest of the parliament.

He signalled he intended to have a budget surplus every year and would only borrow to invest. And he delivered the same, uncompromising message to union leaders at a meeting in Downing Street.

The move, as the government's crucial Comprehensive Spending Review moves into its final phase, puts Labour and the unions at loggerheads and could prove a fundamental test of strength.

Many union leaders believe they did their bit to get Labour elected and it is now time for the government to start repaying the debt with better public services and pay increases.

No ground given

Speaking after the meeting with the chancellor, Rodney Bickerstaffe, the leader of the public service union Unison, said the representatives had told Mr Brown they believed there was room in the government's finances for more spending.

And he said they warned him people would not accept it if he "let the private sector rip but left the public sector dead."

"We believe the country is in a position to spend rather more on those public services - on the infrastructure, on our health service, on education and transport. That was the point we were making.

The unions agreed there should be financial prudence and no return to stop-go economics, he said.

"But we told him there was a worry that we are going to have go in the private sector and stop in the public sector. We have seen that already in pay and jobs," he said.

Gordon Brown: 'Discipline is not for one year'

But the chancellor was giving no ground either in his speech or during the meeting.

"Those who said that we would fail to show the necessary discipline in public spending have been proved wrong.

"And discipline is not for one or two years, but must be locked in and continuous so that we can build the platform of stability upon which prosperity depends.

"This is the way to ensure that Britain will have sustainable public finances over the economic cycle," he said.

John Monks demanding spending increases.

TUC general secretary John Monks earlier led the backlash, saying the government had to make a "fundamental choice".

"If it does not increase public spending then we face growing inequality and poverty and more social exclusion."

Chancellor: spending plans spark union anger

The clash comes as the spending review enters its final stages with all Whitehall departments expected to face demands for economies.

And it has marked out a battle ground between the government and the unions who believe it is time Labour started putting its money where its mouth is.