The government could withdraw from running some public services as part of a root-and-branch review of the role of the state to be announced today.
Ministers believe that Britain's debt crisis is so deep that they must consider whether some state-funded services should be scrapped or delivered by the private sector, charities or voluntary groups – in line with David Cameron's vision of a "big society" rather than a "big government". They will argue that the traditional "salami-slicing" approach of imposing across-the-board cuts in Whitehall budgets will not meet the scale of the challenge and that more radical action is needed.
In the Commons today, the Chancellor George Osborne and his Liberal Democrat deputy Danny Alexander will announce plans for a "once-in-a-generation" spending review this year. It will include the Government's biggest-ever public consultation exercise on spending as ministers try to win support for "painful" cuts, and setting up a "star chamber" of senior ministers in which departments would be forced to justify existing budgets.
Yesterday Mr Cameron prepared the ground for deep cuts with a stark warning that the impact would be felt for years and could involve "difficult decisions" on pay, pensions and benefits. He argued that doing nothing was not an option and would be "unprogressive", since failing to tackle the £156bn public deficit would put services such as health and education at risk.
On the eve of a Downing Street meeting with Baroness Thatcher today, he distanced himself from the harsh cuts that were a hallmark of her era. He promised: "This Government will not cut this deficit in a way that hurts those we most need to help, that divides the country, or that undermines the spirit and ethos of our public services." He added: "We are not doing this because we want to, driven by theory or ideology. We are doing this because we have to, driven by the truth that unless we do, people will suffer."
Mr Cameron claimed the Government's inheritance from Labour was "even worse" than expected. He disclosed that the annual bill for interest payments on the Government's debt alone would spiral to £70bn in five years under the "terrible" legacy left by Labour – more than the amount currently spent on schools, climate change and transport put together.
Speaking in Milton Keynes, he said: "Interest payments of £70bn mean that for every single pound you pay in tax, 10p would be spent on interest. Is that what people work so hard for, that their taxes are blown on interest payments on the national debt? What a terrible, terrible waste of money. So, this is how bad things have got. This is how far we have been living beyond our means. Today, our national debt stands at £770bn. Within just five years it is set to nearly double, to £1.4trn. That is some £22,000 for every man, woman and child in the country."
Mr Cameron gave no precise details of where the axe would fall but criticised some departments for overspending under Labour. The Budget in two weeks is expected to include spending totals for each department for the next three years, with the details to be thrashed out by November after the public consultation.
Outlining examples of what he called scandalous "waste", he said the Department for Work and Pensions had increased benefit spending by more than £20bn; the Ministry of Defence had allowed 14 major projects to over-run by a total of £4.5bn; the Department of Health had almost doubled the number of managers in the NHS and the Treasury "sanctioned all of this because it published growth forecasts that were far more optimistic than independent forecasts".
Mr Cameron said: "I want this Government to carry out Britain's unavoidable deficit reduction plan in a way that strengthens the country. Because the legacy we have been left is so bad, the measures to deal with it will be unavoidably tough, but people's lives will be worse unless we do something now."
Labour accused Mr Cameron of playing a "blame game". Alistair Darling, the shadow Chancellor, denied that he had concealed the £70bn debt interest forecast before the election. "To somehow claim he's opened the books and found things worse than he thought, that's nonsense," he said. "This is a classic case of the new Government blaming the last government in order to pave the way for things the Tories had always wanted to do."
Brendan Barber, the TUC general secretary, said: "Deficit reduction through cuts alone will inevitably hit the poor, the vulnerable and the great mass of middle income Britain who depend on public services. Those at the top will hardly notice."
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