With the two Whitehall departments at loggerheads, the Treasury is calling Mr Rifkind's bluff over his threat to demand a full-scale defence review if pressed to make big cuts in expenditure.
Mr Rifkind's calculation is that, if such a review were made, it would open a far- reaching public debate over Britain's defence commitments and their cost, which could possibly lead to the Treasury having to find more money for the armed forces. However, the Chancellor has raised the prospect that the Treasury will itself press for a review - but only after the argument over the pounds 1bn package of proposed cuts in defence has been resolved. That could leave Mr Rifkind facing further big cuts.
The Treasury is determined to achieve a quick resolution of its calls for spending cuts whether or not the Government goes ahead with a defence review, a source said.
Mr Rifkind is due to hold a second meeting with the Prime Minister and Mr Clarke this week, underlining the seriousness of his battle to protect his budget. The Defence Secretary is relying on powerful Cabinet support from Douglas Hurd, the Foreign Secretary, and Sir Patrick Mayhew, Secretary of State for Northern Ireland, to bolster his pledge to keep his budget intact.
Peter Lilley, Secretary of State for Social Security, has joined Mr Rifkind in opening a second front against the Treasury in the row over the spending round. Mr Lilley is resisting any more changes which will require legislation, most notably the reduction of eligibility for unemployment benefit from 12 months to six. That could save the Government pounds 500m out of a total pounds 1.8bn bill.
The DSS argues that it will be bogged down with legislation tochange the law over invalidity benefit and to reform pension law in the wake of the Goode report. Mr Lilley is arguing against further measures which might be opposed by a significant number of Conservative MPs.
Ministers are still unsure whether the cuts required can be achieved by small savings across the board or by one big, but politically sensitive, change. Other areas likely to suffer are the roads programme, capital spending in health and education and the pounds 689m pledged to help local authorities take over responsibility for care in the community.
However, the Government faces a week of fierce argument over defence, beginning with the publication tomorrow of two reports by the Commons Defence Select Committee suggesting that the armed forces are already overstretched. That will coincide with a two-day debate on defence - timing which will embarrass the Government. Mr Rifkind is expected to announce that the Government will not go ahead with the pounds 3bn nuclear tactical air-to-surface missile project.
His supporters expect strong Tory backbench support for defence spending. One minister said: 'There is a strong lobby which will want to vote for every missile going.'
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