Business leaders say Treasury plans to declare the South West a "low-pay zone" for public sector workers are "horrendous" and could cost the local economy £1.4 billion.

Unions have already condemned Chancellor George Osborne's plans to scrap national pay rates, claiming it would slash average public sector salaries by an average £7,000 a year in some areas.

And with an estimated 200,000 public sector workers in Devon and Cornwall, the move to local pay deals could translate into a drop of around five per cent of the gross domestic product (GDP) of the two counties.

Tim Jones, chairman of the Devon and Cornwall Business Council and the Heart of the West Local Enterprise Partnership, calculated the figures, which he calls "unsustainable and devastating".

Mr Jones said the measures would hit every level of business and the damage could not be "absorbed" by the private sector.

"The deduction from spending power and ability to service mortgages would be horrendous," Mr Jones added.

"Disposable income and consumer spending are key to the local economy in service and retail sectors – in reality it is just not a workable proposal."

The Trades Union Congress (TUC) last week launched a campaign against the introduction of local pay scales for teachers, nurses, prison officers and civil servants.

The move would end the principle of teachers and nurses in Truro or Exeter, for example, being paid the same as counterparts in Surrey.

The TUC claims that harmonising public sector pay with low hourly pay rates in Devon and Cornwall could slash almost a quarter from the average £28,000 salary.

It says hourly pay rates are £3.59 below the national average of £14.90 in Cornwall, and £1.58 less in Devon.

The Treasury argues that national public sector pay deals make recruiting staff difficult for the private sector in some areas.

Mr Osborne announced plans to end national pay rates for public servants in his autumn statement, sparking anger across the region where public sector jobs are often the best paid.

He has now written to the heads of pay review bodies and said he intends to introduce the scheme in 2013.

The Armed Forces, dentist and doctors will be excluded from any deal, which could be based on a local-pay scheme introduced by the Labour government for courts staff.

However, he has told MPs he will not create "crude" wide geographical areas and said any reductions would be implemented through slower wage rises rather than direct cuts.

Ben Bradshaw, Labour MP for Exeter, warned the Commons last week that the move could hit the Westcountry hard.

Mr Bradshaw, a former Cabinet minister, said the effects would be "absolutely devastating" in the South West, where there is already "low pay in the private sector" and "the biggest gap in house-price affordability"

Nigel Costley, regional secretary of the South West TUC, said regional and localised wage negotiations meant "driving down pay to the lowest levels".

Mr Costly predicts young people will seek to "escape" a low-wage economy.

"The latest plan will involve a league table of pay rates across the country, consigning much of the Westcountry to the bottom divisions of pay," he added.