Straitjacket for public spending: Treasury alarms ministers with proposal that will set department against department

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A STRAITJACKET was imposed on public expenditure by the Cabinet last night.

Ministers agreed to keep to the pounds 244.5bn spending total for the next financial year, which could mean cuts for the welfare state, and road and defence programmes. The Cabinet also endorsed a new, much tougher Treasury discipline for future years, which will have the effect of setting one minister against another in the negotiations for higher spending.

The Treasury plan was said to have caused consternation among senior ministers, in particular Michael Heseltine, President of the Board of Trade, and Michael Howard, Secretary of State for the Environment, who were surprised by the scale of the proposals.

Senior ministers denied that curbs on spending would force the Government to renege on some of the promises on which it was elected three months ago.

The Government has now explicitly made clear that the commitment to reduce public expenditure as a proportion of gross domestic product has priority over all other spending pledges.

But that decision, reached at a Cabinet meeting that was expected to last two hours but overran by an hour, will set a severe tone for the remainder of this parliament and is certain to lead to accusations by the new Labour leadership that the Tories had an austerity agenda kept hidden from the electorate.

A cabinet statement said: 'For 1993-94, public expenditure will be kept within existing plans. This year's and future spending rounds will adopt a new top-down approach which focuses solely on the allocation of the available resources. Aggregate spending limits agreed by Cabinet, designed to ensure that the growth in public spending is kept below the underlying growth rate of the economy, will not be reopened in subsequent spending rounds.'

The Chancellor told his colleagues that the new regime had to be introduced because the traditional system for curbing bids for extra spending in a round of negotiations with the Chief Secretary to the Treasury had failed to deliver needed savings.

Spending bids exceeded the planning total for next year by about pounds 14bn. They will be slashed back, but the pounds 8bn contingency reserve will be raided to ease the pressure, and is likely to be halved to meet unavoidable increases, such as the rising cost of unemployment benefit.

In future years, the Cabinet will agree a control total, which cannot be broken. Underlining the political sensitivity of unemployment, the cost of unemployment benefit will be left outside the total. But the Chancellor warned colleagues that when unemployment is falling, they will not be able to claim a bonus from savings.

Norman Lamont, who also gave the Cabinet a 'realistic' forecast on growth, made it clear that the new regime is tighter than ever, because other demand-led items, such as index-linked child benefit, will not be excluded from the control total. That means that any unexpected increases in the social security budget, which the Government has a statutory duty to meet, will have to be paid for by cuts in other departments.

A new committee of Cabinet ministers will be set up to referee the new system, to be started in 1994-5, to ensure that no political blunders are made because of the rigidity of the new system before the election.

Michael Portillo, Chief Secretary, who will return to this year's spending round with cabinet backing for cuts, will tell cabinet colleagues they have savings to make because inflation is lower than expected. The Chancellor said it would mean 'hard choices' with bids for defence, transport, health and social security facing cuts.

How the system will work, page 26

Commentary, page 27

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