By reaffirming the spending ceiling of pounds 253.6bn for next year, the Cabinet has decided that public spending will be 'very, very tight', a Downing Street source said yesterday.
The 'new control total' for 1994-95 is pounds 10bn higher than this year - a rise of 4 per cent. But with inflation at 1.3 per cent and unemployment falling faster than feared, it may not be as tight as the Government claims.
Cyclical increases due to the recession, such as unemployment benefit, have been excluded, to avoid social security enjoying a bonus when unemployment falls.
But officials insisted that non- cyclical demands, such as the increase in take-up rates for benefits, the numbers going into higher education and the increasing number of elderly, had tightened the squeeze.
The Treasury believes that 70 per cent of the public-sector deficit is 'cyclical' - caused by the recession. That leaves about pounds 15bn to be met either from tax increases or cuts in public expenditure.
Some targets have been identified for cuts, such as invalidity benefit. But senior ministers have already limited their scope for manoeuvre. Mr Clarke has ruled out cutting free prescriptions for pensioners, imposing 'hotel' charges on hospital patients and charging for visits to the doctor.
Michael Portillo, the Chief Secretary to the Treasury, said that the principle of universal child benefit was not negotiable. Peter Lilley, Secretary of State for Social Security, ruled out abolishing the ceiling on national insurance contributions, which could save pounds 3bn. 'It's very unlikely that the Conservative Party is suddenly going to adopt a policy that lost the Labour Party the election,' Mr Lilley said.
The Chancellor ruled out complete abolition of mortgage tax relief, which is costing pounds 5.2bn a year, although it is limited to the lower band of income tax of 20p in the pound.
In spite of the Prime Minister's assurance that manifesto commitments will be honoured, ministers will be flexible in their interpretation of the manifesto in meeting the spending targets for the next three years.
The Cabinet remit says: 'EDX has been asked to make proposals to Cabinet in the autumn about the allocation of spending within these totals, taking account of the Government's priorities and of competing claims on available resources.'
The big spenders are Mr Lilley - social security is planned at pounds 59.6bn this year, rising to pounds 61.1bn next year; Mrs Bottomley - health, pounds 29.1bn rising to pounds 30.4bn; and Malcolm Rifkind - defence, pounds 23.5bn rising to pounds 23.8bn. Other big spenders include John Patten, Secretary of State for Education, which takes 15 per cent of total public spending; and Michael Howard, the Home Secretary, whose budget takes 5 per cent.
The new control total is a fixed ceiling, which was first introduced last year. It seeks to isolate real rises in spending and excludes cyclical increases, such as unemployment benefit.
Spending ministers will hold bilateral meetings with Mr Portillo. In mid-July he will report to the EDX committee, which will then decide what is politically acceptable, with the spending ministers called to put their cases.
Tough decisions will be referred to the full Cabinet. The outcome will be decided around the time of the Tory party conference in October, for a final announcement in the unified Budget in late November.
The members of the EDX are: Mr Clarke; the Chief Secretary (Mr Portillo); Home Secretary (Mr Howard), President of the Board of Trade (Michael Heseltine), Lord President (Tony Newton), Lord Privy Seal (Lord Wakeham), and Chancellor of the Duchy of Lancaster (William Waldegrave).
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