NHS and schools face winter crisis

Ministers face choice between spending targets or keeping poll promises

The National Health Service faces a winter of crisis unless the Government breaks its pledge to stick to existing spending plans this year and next, according to independent experts. The health and education budgets inherited from the Conservatives, which Gordon Brown has said Labour will retain for the next two years, cannot be hit without disrupting services.

Pamela Meadows, director of the Policy Studies Institute, said: "Health is the real problem. There is a clear worry that it does not have enough money to get through the winter."

NHS spending faces a shortfall of pounds 300m this year, while more than half of all health authorities and a quarter of hospital trusts started the financial year in debt anyway.

Andrew Dilnot, director of the Institute for Fiscal Studies, said: "One way of construing the spending plans is that they are Ken Clarke's little joke at Gordon Brown's expense."

He said that without an increase in planned spending on health and education this year and next, "there will be a dislocation of services that will be very hard to deal with".

The crunch in education would be likely to take place at the start of next financial year, when existing plans will force local authorities to make big cuts in schools spending.

These fresh warnings at the weekend made it clear that the Government's plans for a long-term review of spending priorities will be overtaken by short-term crises.

They came days before the National Audit Office (NAO) is due to publish its assessment of the forecasts of government spending and revenues made in last year's Budget. The report, which will probably be released on Thursday, is likely to pick several holes in the figures.

The NAO is expected to challenge the predicted savings of pounds 6.7bn over three years from the crackdown on tax avoidance and benefit fraud. It could challenge, too, the former Chancellor's decision to base the social security figures on an assumption of falling unemployment in place of the former convention of assuming unchanged unemployment.

The report is also expected to disagree with Mr Clarke's assumption that the economy's potential long-term growth had climbed by a quarter point to 2.5 per cent a year.

Together, these criticisms could carve a hole of more than pounds 1bn in the public finances this year, rising to some pounds 5bn by the end of the parliament.

Thinking the unthinkable proved too controversial for Margaret Thatcher, who wound up the old Downing Street think- tank after its thoughts on welfare reform were leaked.

The Prime Minister and his Chancellor may be having similar thoughts after Frank Dobson fuelled speculation that the fundamental review could lead to charges for home visits by the family doctor.

But the genie of fundamental reform is out of the bottle, and cannot be put back. The wildest ideas are now fair game; nothing is ruled in, and nothing is ruled out. The review is being carried out across Whitehall, it will last a year, and it will not be simply about cuts in spending.

The review is intended to ask searching questions across departments and inside them: Can we do it better? Should we be doing it all? Can we raise more money from it? If so, how should we use the savings/increased revenue?

The starting point for the review is the Chancellor's order to Cabinet colleagues to stick to the spending totals inherited from the Tories for the next two years. The annual spending review has been shelved to allow ministers to concentrate on the radical questions about the medium term.

The review is not driven by the search for cuts. It is about the scope of public expenditure, and how it can be recast to improve services.

John Prescott, the deputy Prime Minister, said: "I was the advocate of the audit of public assets. I am very happy for the subject of public expenditure to be reviewed to see if we can get better services, and meet our priorities on expenditure.

"We have a corporate objective to achieve those things -health, education, and jobs. They are the targets that we said in five years must be met. That is what we are embarked upon now."

Mr Prescott, who has led the drive for more private finance for public services, said the review was an attempt to change the culture of Whitehall. In his own "super department", the merged environment and transport ministries, he is introducing an integrated transport policy, which could be the key to far-reaching changes in the Thatcher "car economy".

Mr Blair's ministers are also likely to be hindered by a lack of civil servants. Tom Burke, John Gummer's past adviser at the Department of Environment, said in the New Statesman: "Little notice has been paid to the scale of the damage done to the civil service by the last government."