Michael Portillo, the Chief Secretary to the Treasury, last night denied the Government would break its manifesto pledges. He said: 'Our manifesto is fully affordable and deliverable.'
But the Treasury confirmed the Chancellor's new austerity measures will mean cuts of pounds 6bn in 1994-95 and pounds 10bn in 1995-96 in the Treasury's expenditure plans - published in the so-called red book - which formed a key plank in the Tory election platform.
A Treasury spokesman said: 'It is true that it is a tougher regime than was implied in the red book. They are demanding targets.'
Ministers were still assessing the full impact of the Chancellor's decision to impose a fixed ceiling on spending, but some were shocked by its severity.
Manifesto commitments on health, housing, road building and prisons could be compromised or delayed, but the pounds 66bn social security programme is a prime target.
The financial markets gave a muted reception to the Treasury's spending squeeze, with some City analysts worried that the Government's attempt to regain control of its expenditure by such deep spending cuts might further prolong the recession. The Chancellor's difficulties were underlined earlier this week when the Government was forced to retreat on a savings bond which threatened to trigger a rise in mortgage rates by building societies.
Andrew Dilnot, of the independent Institute for Fiscal Studies, said: 'You are looking at quite large cuts. It means you have to go to the big spending departments: social security, health, defence, and education. Defence is already being cut. The Government is committed to health and education. Social security, the biggest spending department, is quite
Social Security ministers are considering cutting the right to claim unemployment benefit from a year to six months. It would require legislation and would be highly controversial at a time when unemployment is rising, but some ministers are ready to support it, to force people to look for jobs.
Benefits to the unemployed will be excluded from the new 'control total' imposed by the Chancellor, but the Treasury said savings would be sought wherever possible. Taxing other social security benefits to target them at those on the lowest incomes is being considered.
Acute prison overcrowding could get worse and the Tory election pledge to 'sustain our massive prison reform and building programme' could be challenged. Kenneth Clarke, Home Secretary, is bidding for more cash to clear police cells of remand prisoners.
He has asked for more emergency accommodation in army camps, but has failed to secure extra space. One option is 'executive release' of prisoners near the end of their sentences, but he privately admits it would cause a revolt among Tory law-and-order supporters.
Other pledges, such as the commitment to invest pounds 6.3bn on roads over the next three years, could be delayed.
The pounds 24bn defence budget is being squeezed to provide a bigger peace dividend, but savings could be hard to find. That is certain to reopen the Whitehall battle over Treasury demands to abandon the pounds 10bn European fighter aircraft, in spite of the Prime Minister's own commitment to the project.
Mr Major has also assured Tory MPs that there will be sufficient funds to avoid the council tax, being introduced next April, becoming as unpopular as the poll tax.
That could require an extra pounds 1.5bn on the budget of Michael Howard, the Secretary of State for the Environment, who is one of the ministers reported by officials to have greeted the Chancellor's cabinet statement with consternation.
City economists were doubtful that the new 'top-down' approach - in which ministers compete for shares of a spending total determined three years in advance - would prevent the Government from yielding to pressure for higher expenditure as the next election approached.
The Treasury's implicit forecast that inflation would fall to 2.25 per cent in 1994-95 and 1995- 96, which emerged with details of the new spending regime, was regarded sceptically.
Analysts concluded that if the Treasury did expect inflation to fall to those levels it must expect a much weaker economic recovery over the next few years than it predicted at the time of the Budget.
Election vows, page 9
Leading article, page 20
Peter Kellner, page 21
Target doubts, page 22
Hamish McRae, page 23Reuse content