In his budget address last month, chancellor of the exchequer George Osborne said he wanted public sector pay to be 'more responsive to local pay rates' in order to 'help our private sector to grow and create jobs in all parts of the country'.
Public sector workers earn around 8 per cent more on average than their private sector counterparts, according to figures from the Institute for Fiscal Studies. In Wales, pay is 18 per cent higher for those in public sector positions. The disparity could be reduced without damaging the public sector's ability to recruit, retain and motivate staff, ministers argue.
Changes could involve replacing nationally-agreed NHS pay with locally-negotiated agreements, and would mean nurses in different parts of the country are paid different amounts for doing the same job.
The NHS Pay Review Body is consulting on 'market-facing pay', and will submit its report to ministers on 17 July.
It has not yet been decided whether localised pay would apply only to new staff or also to existing staff, but ministers have implied that no current employee would be forced to take a pay cut.
However, nurses' leaders warn any departure from nationally-negotiated pay would lead to 'damaging competition between trusts for staff; entrench low pay in certain areas; and erode staff morale'.
'AfC means that, in any part of the country, employers know they can recruit staff with the right skills and experience to give patients the care that they need,' says RCN general secretary Dr Peter Carter.
'A move which could see two nurses doing the same job but with a wide disparity in their pay could seriously short-change patients in those areas which do not pay appropriately,' he argues.
The first public sector posts being considered for localised pay include 16,000 staff in the Department for Transport, including those working for the DVLA; 100,000 staff in the Department for Work and Pensions; and 21,000 posts in the Home Office.
However, implementing the new system for health workers could be far from straightforward, as RCN head of employment relations Josie Irwin (pictured) points out.
'Every government seems to go through a period where local pay becomes flavour of the month, but then it fades away when employers realise how difficult it is to implement,' she says. 'It has been on and off for the last 20 years, and in the past it has always been demonstrated that local pay for health staff does not stand up to scrutiny.'
Critics point out that lowering salaries in deprived areas could result in greater inequalities. However, under the plans, public sector workers in expensive areas could see their pay go up, in order to reflect local prices.
'The London weighting makes sense, because it is based on the fact that it is more expensive to live there,' says Ms Irwin. 'The problem we have is that the rhetoric used in the Treasury's arguments is all about driving pay down in deprived areas.'
She concedes that there could be advantages to looking at revamping the pay system, to enable staff working in more expensive areas of the UK to be rewarded accordingly. Currently, AfC rates are only able to reflect the higher costs of living in London, outer London and areas on the 'fringe' of this zone.
NHS Employers is in favour of looking at alternatives to AfC, but warns changes to the established system could increase costs if wages in some areas rise significantly.
'Employers are concerned that a crude zone or regional system would not work effectively across the range of occupations and professions that exist in the NHS,' says director Dean Royles.
There is also the danger that nurses living within areas close to regions with higher pay might commute for a higher salary. This pitfall was highlighted in a report produced by employment research organisation Incomes Data Services.'
'The Metropolitan police significantly increased the combined London allowances they paid to retain staff but neighbouring forces swiftly began to lose officers who would commute and work for the higher-paying Met,' the report says.
As private companies, general practices are not obliged to pay staff AfC rates. While some do, others pay more to attract and retain high-quality staff, while many pay less.
GP partners could see local pay- setting as an opportunity to look at their own payment provision and reduce practice nurses' salaries.
'There are many good general practices, that pay nurses at AfC levels,' Ms Irwin explains.
'But there are less good employers, who might climb on the bandwagon if there is a tendency in their area to pay nurses less than might be considered an appropriate wage.'
Last week, members of the National Union of Teachers voted to ballot for strike action if solid plans to bring in localised pay are confirmed.
The RCN and the Unite union say it is too early to comment on possible strike action.