Key Points:

Prime Minister John Key's move yesterday to freeze MPs' pay is intended to send a strong message to the wider state sector that it should expect little or no pay increases in the coming term of Parliament.

He also hopes that pay restraint in the private sector will help minimise job losses as the economic downturn bites.

Mr Key would not rule out pay cuts for public servants in the next three years - as has happened in Ireland - but said it was "unlikely" and was not on the Government's agenda "at the moment".

State Services Commissioner Iain Rennie said last night there would be no increased spending overall for chief executive salaries this year.

For the wider public service, whose pay is determined by chief executives, he expected a "marked moderation" in pay settlements compared with the 3-4 per cent achieved in recent times.

And he suggested that the alternative to restraint would be public service job losses.

"We will be looking at wage moderation across the state sector at all angles."

He wanted to moderate increases quickly "because the more successfully we can do that, the more likely we are to be able to maximise employment in departments around current levels".

"Clearly the more pressures there are on wages the more difficult it will be for departmental managers to keep current staffing levels."

Yesterday, Mr Key wrote to the independent pay authority that sets MPs' salaries and urged restraint. He said his own National Party would file a submission for a zero increase in parliamentary salaries.

"In taking the action we have taken we are sending a pretty strong signal that restraint is going to be necessary right across the public sector," he told the Herald.

"We are sending a pretty strong message that at a time when New Zealanders are losing their jobs, those who have greater job security because they are part of the Government sector should take that on board."

Asked if it was also an example for the private sector, he said there inevitably would be consideration of trade-offs for more modest pay rounds in return for lower job losses.

"And certainly our preference would be to see more people able to keep their jobs even if that meant a lower pay round for the next 12 months."

Mr Rennie said the chief executives whose pay he controlled knew there would be no overall increase this year - there could be modest pay increases for some, but there could be pay cuts for others.

He said he would be writing to the boards of Crown agencies that controlled the pay of heads of the likes of district health boards, ACC, university vice-chancellors, Housing New Zealand and the New Zealand Transport Authority setting out similar expectations of restraint.

He did not expect any pay cuts this year beyond chief executives.

The core public service numbers 45,000 employees, but with the education and health sector taken into account it is 200,000.

The biggest public sector negotiations in the next six months would be for police officers and education support staff. The big education and health agreements were not up for negotiation until 2010.

Public Service Association national secretary Brenda Pilott said last night that the organisation was not ignorant of the need for Government departments to operate under constraint but people expected their wages to at least hold value with inflation.

She would be contacting Mr Rennie first thing today to clarify whether there has been some change in the way public service wages are to be negotiated and whether he is under instruction.

Labour leader Phil Goff supported restraint by MPs but said the Remuneration Authority should have the statutory power to take into account what was happening to ordinary New Zealanders when it set pay. He would support a law change to do that.