Gordon Brown burnished his reputation for austerity – and took a swipe at his predecessor – by announcing yesterday that he is to give up the grace-and-favour pension, worth more than £64,000 a year, payable to former prime ministers.

Mr Brown sought to set a personal example as he rejected an above-infla-tion pay rise for MPs, insisting instead that they receive 1.9 per cent in line with other public sector pay deals.

After frantic last-minute haggling, however, the Government kicked into touch a series of recommendations to tighten allowances and postponed changes to MPs’ pensions.

Harriet Harman, the Leader of the House, confirmed that a new review would look at taking Commons salaries out of MPs’ hands altogether, as she published the report by the Senior Salaries Review Body, which had recommended a 2.56 per cent hike.

Urging restraint, she said: “We have to ensure that, in the public sector, awards remain consistent with the inflation target of 2 per cent.” MPs will be given a free vote on the proposed rise next Wednesday but, with David Cameron ordering the Conservative front bench to support the Government, there is little chance of a successful backbench revolt.

Mr Brown’s sacrifice will throw into stark relief the personal finances of Tony Blair, who announced last week that he has taken a part-time job with the US bank JP Morgan Chase worth a reported £1 million. In its report the SSRB said that the pension, worth half the prime ministerial salary, was set up so that those leaving No 10 “should not need to seek further employment” and was “no longer justified”. “We consider that former office holders are most unlikely to suffer financial hardship,” the independent body notes. Michael Martin, the Speaker, has won a battle with Mr Brown to keep his grace-and-favour pension, however.

The report admits that some MPs’ expenses, such as the Additional Costs Allowance, which allows MPs to pay rent or a mortgage on a second home and to buy furniture, are open to abuse. It says: “The ACA may have been seen by MPs as a means of supplementing their pay, and although it is now properly treated as a reimbursement of costs, it is still regarded by some as ambiguous.”

It recommends renaming it as Personal Accommodation Expenditure and proposes a further review.

It made a number of suggestions on MPs’ allowances, such as a requirement for MPs to submit receipts above £50, down from £250, and for the National Audit Office to audit the expenses of a representative sample of MPs each year. The report also recommends a further review of peers’ allowances, suggesting that they may be allowed to claim attendance allowances when away from Westminster on parliamentary business. But the Government has referred this to a committee.

John Spellar, the chairman of the Advisory Panel on Members’ Allowances and one of those calling for MPs to receive a full increase, gave a cautious welcome to the deal. He said: “MPs will be pleased that there is an acceptance that their pay has fallen behind prices and average earnings.”

The pay deal recommended by the SSRB would have cost the taxpayer £1.04 million on top of the present MPs’ pay bill of £54 million.

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