Falling pound may force tougher spending cuts

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DEEP CUTS in public expenditure requiring election manifesto commitments to be abandoned will be on the agenda for a crucial meeting of a special Cabinet committee today chaired by Norman Lamont, the Chancellor.

The withdrawal of sterling from the European exchange rate mechanism (ERM) has forced the Cabinet committee on public expenditure to make even deeper cuts. Some ministerial sources said it could mean the Government going below the pounds 244.5bn ceiling, agreed by the Cabinet in July, in an attempt to re-assure the financial markets and stop sterling falling further on the exchanges.

One ministerial source said: 'Being outside the ERM means we will have to be much tougher. A lot of our manifesto commitments will have to be discreetly dropped. 'In the lifetime of a Parliament' is a phrase which is going to be well-worn at the party conference next week.'

The cuts have led to divisions within the Cabinet committee. Kenneth Clarke, the Home Secretary, and Michael Heseltine, the President of the Board of Trade, have been fighting to avoid cuts affecting infrastructure. They have argued instead for cuts in planned spending on public sector pay.

Reductions in social security benefits would need legislation, and take too long, leaving capital schemes, such as roads, housing, schools, the inner cities, and hospital building to bear the brunt of the Treasury axe.

The Chancellor hinted that the planning total of pounds 244.5bn might have to be reduced in the aftermath of 'Black Wednesday'. He said: 'With sterling now floating outside the exchange rate mechanism, a rigorous approach to public spending will be even more important.'

One of his friends said: 'It is unlikely we will go below the ceiling. The are some very difficult decisions being taken, but it is possible. It's very tough.'

The Autumn statement for 1993-4 will set the scene for greater austerity in the following two years as a result of the recent 15 per cent devaluation of the pound compared with the former ERM central rate of DM2.95.

The cut in interest rates to 9 per cent, which accompanied the withdrawal of sterling from the ERM, could lead to higher-than-expected inflation in future years, which in turn would force up the cost of index-linked benefit rises, and eat into other programmes.

Michael Portillo, the Chief Secretary to the Treasury, has presented a range of cuts to the Cabinet committee, said by insiders to be 'very radical. . .he has been saying, if you don't like this, you can try these other options, which are worse.'

Ministers, including John MacGregor, the Secretary of State for Transport, and Michael Howard, the Secretary of State for Environment, who are facing cuts in spending, have submitted papers to the Cabinet committee to defend their budgets.

The Treasury is resisting appeals by Mr Howard for a multi-billion increase in his budget to soften the impact of the council tax.

Today's meeting will be the fourth meeting of the Cabinet committee, known as EDX. The first meeting agreed procedures, the second assessed priorities, while the third, last week, discussed a range of illustrative options for cuts, which will be on the table for this afternoon's meeting.

One Treasury source said: 'The Chancellor has made it clear that pounds 244.5bn is the upper ceiling. Ministers are determined to stick within that total. If they can get below that, it will have to be by mutual agreement of the Cabinet.'

The ministers want to avoid the spending cuts overshadowing next week's Conservative party conference and will be seeking to impress on the City their determination to rein back public expenditure before they leave for Brighton.

The Chancellor will report to the Cabinet on the final outcome of the cuts, when Cabinet 'victims' can make an appeal. But, with restraint being forced on the Cabinet, it is unlikely the package will be undone, once it is agreed by the EDX committee.