Tories were warned about anger at austerity before the election

Concerns about austerity and the public-sector pay cap were highlighted in internal Conservative research carried out before the general election, leaving senior figures aghast that the party failed to act upon the warnings, the Guardian understands.

Individuals taking part in a series of in-depth focus groups raised widespread concerns over issues such as school cuts and the lack of pay rises for loved ones working in public services, such as nurses and teachers, sources have revealed.

The findings suggested that people had found austerity too one-sided and wanted to see the fruits of their efforts and a less ideological approach.

It comes as Conservative backbenchers urged the prime minister to spend the summer break working on distinctive Tory solutions to the economic grievances channelled by Jeremy Corbyn in last month’s general election campaign.

George Freeman, the Mid Norfolk MP and former chair of the prime minister’s defunct policy board, said he believed Labour successfully articulated a series of public grievances during the election campaign, including frustration at the impact of prolonged austerity and the angst of millennials who feel shut off from the benefits of a growing economy.

“Corbyn has identified the right grievances, but his policy prescription is ridiculous,” Freeman said. “We need to respect those grievances and come up with a distinctive Conservative response.”

One source suggested that May was now determined to take action, following Corbyn’s unexpected surge in popularity, and was considering pushing back even further government targets to balance the budget more.

The chancellor, Philip Hammond, has already abandoned the 2019-20 target to deliver a budget surplus set by his predecessor, George Osborne, instead saying that finances should be returned to balance as early as possible within the next parliament.

In the party’s 2017 manifesto it was suggested that the aim would be a “balanced budget by the middle of the next decade”.

The source said a debate was under way about to what extent targets mattered, with some determined not to cede ground because “Corbyn and Labour will also outbid us”, and others thinking flexibility was needed after seven years of hard graft.

The work is going on amid a clamour for the government to lift a public-sector pay cap and pour more money into the health service and schools.

It comes after teachers were told they would have another year in which pay increases were limited to 1% and the education secretary, Justine Greening, found an additional £1.3bn for schools, but only as a result of raiding other parts of her own budget.

Thomas Pope, a research economist at the Institute for Fiscal Studies, said the decision over public-sector pay and austerity more generally was “a political choice”. “There are trade offs – the downside of relaxing public-sector pay is that it could increase debt and make balancing the budget that much harder by 2025. The benefit is that it would potentially boost motivation and make retention easier.”

The Tory source also revealed there was some tension between Hammond – who they said was determined to retain constraint on public-sector pay in order to maintain confidence in markets – and others more minded to take action to ease the situation - although the suggestion is rejected by the Treasury.

And they said that research since the election had shown that May’s position on Brexit – focusing on the 52% and the “will of the people” – had been a key problem for a number of voters who backed remain in the EU referendum.

After weeks spent hearing from concerned voters on doorsteps about cash-strapped public-sector workers, school budget cuts and insecure employment, MPs are pressing the party leadership to find a more convincing offer, particularly for younger voters.

One backbencher told the Guardian that the party was at risk of “re-toxifying” its brand, by appearing to be on the wrong side of the public debate about a series of issues, including public-sector pay.

Downing Street insiders say Hammond, who has been portrayed as a fiscal hawk, is keen to use his autumn budget to signal that he has heard the concerns of hard-pressed workers, without spooking Britain’s creditors in the financial markets.

One proposal under serious consideration is that ministers could be allowed to use any savings they can make within their departmental budgets to boost staff pay, busting the rigid 1% cap on wage bill rises – in a similar way to Greening.

Several of the MPs bidding for jobs in the recent round of elections for select committee chairmanships used their election statements to demand reforms.

Freeman, who is convening a “Conservative ideas festival” in September to encourage fresh thinking, has called for several reforms, including paying bonuses to public-sector workers, and allowing departments to keep the benefits of any savings they make.

Robert Halfon, the new chair of the education select committee whom May recently sacked as a minister, has called for a new wave of modernisation in the Tory party – distinct from the changes wrought by David Cameron.

“Conservatives have to somehow create a fusion of policies that appeal both to workers’ conservatism and metropolitan types,” he wrote in a recent blog for the website Conservative Home. He cited “the ‘national living wage’, apprenticeships and lower taxes as some examples above.