Labour to pledge two-year public spending freeze

Labour would freeze public spending for at least two years, Gordon Brown, the shadow Chancellor, will announce today. He will tell an audience of businessmen this afternoon that Labour intends to stick to the Conservatives' spending target until 1999 at the earliest.

Even ministers in cash-starved departments such as education and health would have to do battle with each other for an extra share of existing resources, Mr Brown will say. The traditional public spending round, in which ministers lobby the Chancellor for extra cash, will not happen this year if Labour wins the election.

"The first question for a Labour government will not be whether to spend an extra billion here or there, but whether we are using the existing pounds 300bn total public spending efficiently and in a way which meets Labour priorities," according to sections of the speech released last night by Labour sources in a move to underline the importance of the announcement.

The total public spending in 1997-98 would be pounds 266.5bn under Labour, rising to pounds 273.7bn in 1998-99 as detailed in Mr Clarke's plans.

In the first year of a Labour government, each minister would be expected to review spending priorities in his or her department, Mr Brown will announce. A cabinet sub- committee would examine the results of this process in an exercise which would replace the normal public-spending round.

Although the party is not ruling out some shifts of cash between departments in 1998-99, sources stressed last night that ministers would need to prove their case during the review process. Mr Brown will say: "The remit of this comprehensive spending review will be to put our public spending principles into practice. At the centre of each is our commitment to shift resources from welfare to education."

If the party comes to power, Mr Brown will announce a budget within six to eight weeks, which will impose a windfall tax on the former public utilities along with any other tax changes announced before the election. For example, should the party decide to go for a 50 pence top rate of tax for those earning over pounds 100,000 it would be brought in then.

However, money raised through the windfall tax will be spent on getting the unemployed off benefit and back to work. Although ministers will be able to shift money within their own departments in the 1997-98 financial year, they will have little scope to do so because detailed spending plans will already have been drawn up - for example, the bulk of the schools budget will already have been distributed through local authorities.

Labour has not yet decided whether to have another budget in the autumn or in the New Year, but when it comes it will stick broadly to the parameters set out by the Tories.

The shadow Chancellor will also announce a tough attitude to public sector pay rises, and will tell his audience that settlements must come from existing departmental budgets. The approach will be "firm and fair", he will say.

Labour sources last night dismissed reports that the party would raise pounds 10bn through its windfall tax as speculation, however. They will also be anxious to dispell the effects of new research published today by the investment bankers NatWest Markets, which presents a list of pounds 34bn in tax increases which a Labour government could introduce within five years.

A further shift in Labour's policy on business is expected on Tuesday, when the left-leaning Institute for Public Policy Research publishes the findings of its Business Commission. The members of the commission include David Sainsbury, chairman of the supermarket group, and George Simpson, managing director of GEC.

Tony Blair has already hinted that the party is to change its stance on competition. Plans to subject all corporate takeovers to a new public interest test could be scrapped, he said last week, along with a planned merger of the Office of Fair Trading and the Monopolies and Mergers Commission.

As the party continues its effort to head off any possible speculation that it would form a "tax and spend" government, it also faces a crucial test in the House of Commons this week.

The party's deputy leader, John Prescott, will arrive home from a visit to China two days ahead of schedule in time for a crucial vote on the National Health Service on Tuesday. Labour hopes to use the occasion to inflict a defeat on the government, which is now in a minority of one after the death of the Meriden MP Iain Mills.