It has begun to put more than pounds 6bn of housing subsidies under scrutiny in an extension of the review, which is causing mounting clashes between the Treasury and departmental spending ministers.
Without making firm proposals, a Treasury paper circulated in Whitehall argues that council house tenants and owner-occupiers are subsidised by the taxpayer, putting the private rented sector at an unfair disadvantage.
An inter-departmental review is expected to examine whether savings can be made in housing benefit, improvement grants and, in the longer term, on the Housing Corporation's pounds 2bn a year budget. The Corporation's budget is protected by the manifesto - but only for the next two years.
The disclosure comes as Michael Portillo, Chief Secretary, is already at the centre of a storm over proposed Treasury options for cuts in health and social security. Although the housing review does not yet have the full status of the medium- to long-term reviews of health, education, social security and Home Office spending, senior Treasury sources acknowledged that a 'data base' on housing finance was being compiled and 'searching questions' would be asked during the summer.
Environment ministers will argue that there is little room for cuts - any increase in council rents would simply cause increased benefit claims. Attempts to tamper with improvement grants would make it less attractive for tenants to buy their own homes. The Tory manifesto pledges to maintain mortgage interest tax relief.
But the focus on housing will be seen as underlining Treasury determination to extend its longer-term review beyond the departments already in the spotlight. Norman Lamont, Chancellor of the Exechequer, who is strongly backing Mr Portillo, is understood to have the long-term aim of reducing public expenditure to 40 per cent of Gross Domestic Product. At present, it is 45.4 per cent and is expected to fall to 44 per cent in 1995-6. Some hawkish Cabinet supporters of the spending review believe the Government should not be deterred by fears of parliamentary defeat from introducing legislation to implement proposed cuts.
Amid growing dismay among backbenchers and some ministers over the electoral impact of the row over spending, Virginia Bottomley, the Health Secretary reaffirmed that her 'bottom line' was a 'health service which provides quality care on the basis of clinical need, not ability to pay'.
She stuck closely to the Cabinet's formula that no options were being ruled out, provoking William Powell, MP for Corby, into declaring: 'She should have said that if the Cabinet approved the idea of charging for NHS beds, she'd resign.'
Mrs Bottomley was said to be determined to resist measures that would undermine public faith in the Conservatives' commitment to the NHS. As Labour accused ministers of also being ready to tamper with child benefit, Gordon Brown, shadow chancellor said that Mr Portillo had announced a new principle - 'that the sick must come to the aid of the Government'.
In the short term, however, the row over spending will be overshadowed by concerted government efforts to avert defeat in Tuesday's Report Stage of the bill to privatise British Rail. Sir Keith Speed, MP for Ashford and leader of a revolt against the plans, said that up to 14 Tory MPs were ready to back amendments, including one to allow BR to compete for franchises. The bill faces further trouble in the Lords.
One possible compromise being suggested by Tory critics is that BR should have the right to make 'shadow bids' for routes which would be used by the franchise director as comparisons with private sector tenders.
John MacGregor, Secretary of State for Transport, opposes this, but is thought ready, if he faces defeat, to offer concessions such as greater guarantees of reduced fares for pensioners and students.
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