William Waldegrave, Chief Secretary to the Treasury, has identified the pounds 12.3bn budget as one of his prime targets in the tough fight over public spending.
Ministers at the Department of Social Security are resisting reductions in the benefit, paid to low-income households to help their housing costs. But they believe that some progress can be made on reducing fraud - cutting out double claims, for example.
From next year, benefit payments will be curtailed under new rules. But the Treasury is still worried about soaring costs. An extra 80,000 people claimed housing benefit in 1994-95: a 2 per cent increase on the 4.74 million claimants. But the total bill for the benefit rose by almost 10 per cent.
Other key spending departments that have yet to settle with Mr Waldegrave include Health and Education. John Major has promised Education a more generous settlement, after a middle-class rebellion over cuts.
Following the Prime Minister's pledge on Friday to reduce taxation, ministers believe that a substantial package of reductions will be put in place over the next two years, with a promise of further cuts if the Tories are re-elected. One Cabinet source said the Government could probably afford pounds 5bn over three years, although some colleagues believe that figure to be on the low side.
Yesterday the Labour leader, Tony Blair, claimed that Mr Major had caved in to the Tory right. In his first comments on the Conservative Party conference, Mr Blair accused the Tories of shutting down the business of government to become merely a "gigantic propaganda machine".
He also highlighted the Euro-sceptic speech from Michael Portillo, Secretary of State for Defence, which provoked an outcry from pro-European Tories. "The abiding image of the week was of the Prime Minister being first to rise in salute to Michael Portillo's juvenile and ill-informed rant," said Mr Blair. "Instead of offering his hand in congratulation, he should have told Mr Portillo there was no place for an extremist in his Cabinet."
The Conservative Party chairman, Brian Mawhinney, accused the Opposition of resorting to "silly sloganising" and insisted the Blackpool gathering had been a success. But Jacques Santer, the European Commission President, criticised Mr Portillo's speech in an interview with Jonathan Dimbleby, to be broadcast today. He agreed with his officials, who were quoted as calling it "grotesque and deplorable". He said of Mr Portillo's views: "I must say that my Tory friends in the European Parliament and elsewhere were not very happy."
l Mr Blair will reshuffle his Shadow Cabinet this week, with the appointment of a new chief whip - a post that used to be filled by direct election, but will will come from the elected cabinet. Possible candidates include Donald Dewar, shadow social security secretary; Frank Dobson, shadow environment minister; and Jack Cunningham, shadow trade and industry secretary.
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