Ministers have become alarmed at the growth in invalidity benefit from pounds 840m in 1979 to pounds 6.1bn. Norman Lamont, the Chancellor, put off taxing the benefit in the Autumn Statement, but taxation and tighter rules for eligibility are being considered, following evidence that family doctors are bowing to pressure to sign too many on to it.
Gordon Brown, Labour's spokesman on Treasury affairs, yesterday demanded the publication of the Treasury letter, which asks Whitehall civil servants to illustrate the effects of a cut of 2.5 per cent and 5 per cent in their departmental budgets.
Mr Brown said he was also told that the overall spending figure for 1996-7 had been set at the same cash level as 1996, meaning there would be substantial overall cuts in the real value of services.
The Treasury had issued the letter because it had decided to bring forward the public spending survey report from the November Budget to be ready in April.
'These new revelations are a direct breach of both the Government's election manifesto promises,' Mr Brown said.
'It is the excuse for sharp cuts in public services threatening thousands more jobs and making the Government the biggest contributor to rising unemployment.'
Although Whitehall sources yesterday insisted that the Treasury letter was routine at the start of a spending round, it underlined the dilemma facing the Chancellor in balancing his Budget.
The Cabinet meeting last Thursday was divided over whether Mr Lamont should raise taxes in his Budget on 16 March, or cut public expenditure. John Major earlier appeared to favour delaying until the second Budget in November, but a majority now believes tough decisions cannot be put off.
That view was shared by many of the minister's special advisers who were meeting at the Cabinet Office and some emerged adamant that Mr Lamont should increase taxes and cut spending.
Confirming the Treasury's search for cuts, Virginia Bottomley, the Secretary of State for Health, yesterday signalled her willingness to cut the burgeoning health service drugs bill.
However, she insisted that the Government would honour Mr Major's election pledge to increase overall NHS spending each year in real terms.
'All spending departments are making sure they are looking at the options. But the commitment stands to maintain resources for the health service,' she said on the BBC's On the Record programme.
'I can't afford to have the drugs bill going up by 12 per cent when I'm holding nurses' pay to 1.5 per cent. We will work with the Treasury looking at options, setting out ways in which the pounds 100m a day could be better spent.
'There are a great many savings we can make . . . But there is a world of difference between setting out options for the Treasury and maintaining our commitment of real terms increases for the health service which we stand by.'