One room, nine politicians, Britain's future on the table

In the shadow of Cardinal Wolsey and George III, the Star Chamber is deciding how the spending axe will fall

The hand of history could hardly be heavier as the Coalition Government's "Star Chamber" decides where the public spending axe should fall. It meets in a Cabinet Office room with a throne in the corner, last used by George III – the most recent monarch to attend Cabinet meetings.

Attending his first meeting of the Chamber last month, Eric Pickles, the burly Communities Secretary, jokingly asked to see where the "instruments of torture" were kept. Remarkably, they have not been needed yet. But there's still time.

Fittingly, the room also houses the Treasury Board's table, on which the exchequer rolls used to be laid in the days when the nation's budgets were totted up. Around a square table sit the Star Chamber's nine ministers, who must make the cuts add up to £83bn. George Osborne, the Chancellor, will announce their conclusions in his comprehensive spending review (CSR) next Wednesday.

Officially, the room is Conference Room A at 70 Whitehall, next to the office of Sir Gus O'Donnell, the Cabinet Secretary. For many years, the Sir Humphreys – the permanent secretaries from each government department – met in it every Wednesday morning without their (temporary) political masters.

Today the ministers are in the driving seat as they try to find the deepest cuts ever undertaken in peacetime, averaging 25 per cent for departments over four years. The Cabinet's Public Expenditure Committee is chaired by the Chancellor. Whitehall officials call it "PEX", while politicians tend to call it the Star Chamber, after the court at the Palace of Westminster that Cardinal Wolsey used to bring actions against opponents of Henry VIII which became a byword for secretive and arbitrary justice.

Agreement on capital spending such as building projects was struck in the "throne room" on Monday. Most Cabinet ministers have settled their spending totals for the next four years with the Treasury without being summoned for interrogation by the Star Chamber. But there are three areas where heated negotiations with the secretaries of state may go to the wire: defence, welfare and education.

Liam Fox, the Defence Secretary, is arm-wrestling with Mr Osborne over the Treasury's demand for a 10 per cent cut in his £40bn budget. Although agreement has been reached on the first defence review since 1998 at the National Security Council, chaired by David Cameron, the Ministry of Defence's spending totals have still not been finalised. Dr Fox's allies claim he is fighting hard and making progress. But his semi-public campaign has irritated Mr Cameron and Mr Osborne.

Iain Duncan Smith, the Work and Pensions Secretary, has secured agreement with the Chancellor for a universal credit to replace working age benefits that would ensure everyone would be better off in work than on state handouts. The unfinished business relates to finding billions of savings to finance the £3bn upfront cost of the universal credit, and further cuts from the £192bn welfare budget to contribute to the deficit reduction.

Sensitive issues include universal benefits for pensioners such as the winter fuel allowance and free television licences and bus travel. Mr Duncan Smith is believed to be ready to cut them but Mr Cameron has a dilemma: he accused Labour of telling "lies" before the May election when it claimed the Tories would scrap these benefits. The Prime Minister is standing by his election pledges, but that could still leave him wriggle room to increase the age at which the handouts start, since he would not be abolishing the allowances.

Some insiders predict a trade-off between the welfare and defence budgets for the Government to reach the £83bn finishing line. Others say that is too simplistic: the Treasury knows what it wants from Dr Fox and Mr Duncan Smith, so there will not be a penalty shoot-out between them.

Agreement is closer on the education budget, where Michael Gove, the Education Secretary, has a powerful ally in Nick Clegg, the Deputy Prime Minister. One of the Liberal Democrats' four key promises at the May election was a "pupil premium" to help children from disadvantaged backgrounds. Although the Tories backed a similar scheme, there was still a battle to secure the £2.5bn-a-year programme favoured by the Liberal Democrats at a time when draconian cuts were needed.

The crucial negotiations on this issue in recent days were handled not by the Star Chamber but by what is emerging as the most powerful group in the Coalition: the "quadrilateral group", an informal comprising of Mr Cameron, Mr Osborne, Mr Clegg and Danny Alexander, the Liberal Democrat Chief Treasury Secretary.

It was the quadrilateral group that gave the go-ahead for last week's Tory conference announcement that child benefit would be withdrawn from families with someone on the 40p income tax rate. Although the Cabinet had discussed it, some members admit they were not told of the final decision until the day of Mr Osborne's announcement. This led to carping from some Tory ministers, saying two Lib Dems were more in the loop about the Tory conference than they were.

Ministers are still getting used to coalition politics. One theme to emerge in the spending review is that there have been few Tory versus Liberal Democrat battles. The two ministers who have clashed most fiercely with the Treasury are Dr Fox and Mr Duncan Smith in what were described as "blue on blue" disputes after friendly fire incidents in war zones. The "yellows" in Mr Clegg's party have surprised their Tory counterparts by being remarkably hawkish about tackling the £155bn deficit. "On some issues they are much more right-wing than I am," quipped one Tory minister.

Mr Alexander is seen as a deficit hawk by senior Tories. Mr Osborne insisted he saw all the Treasury papers, a process replicated across Whitehall – to the surprise of civil servants, whose instinct was to restrict some documents to Tory ministers' eyes only.

Treasury officials insist that the Star Chamber has played a vital role in the spending review, ensuring "collective buy-in" from the Cabinet and allowing the nine ministers to look across the Whitehall waterfront and beyond their own territory. The threat of interrogation and the "instruments of torture" have concentrated minds, the Treasury believes. One minister admitted: "It's not a good idea to plead poverty to your Cabinet colleagues. If they let you off the hook, they will have to find more cuts themselves."

Not everything went to plan. Mr Osborne hoped Kenneth Clarke, the Justice Secretary and former Chancellor, would be lured into settling his budget by the system under which ministers striking early deals would be rewarded with a place on the Star Chamber. "Ken was too long in the tooth to fall for that," one aide said. "He wasn't going to be bounced into reckless cuts just to sit in judgment on others." Although Mr Clarke's budget is almost done and dusted, it came too late for him to join the Chamber.

The other minister the Treasury was keen to get on board was Chris Huhne, the Liberal Democrat Energy and Climate Change Secretary. He obliged by reaching an outline deal and won a seat at the table.

The Star Chamber was used to settle public spending disputes during the last Tory Government. As Chancellor, Gordon Brown preferred one-to-one negotiations with Cabinet "colleagues." Although Mr Cameron always pledged to restore formal cabinet government, the Coalition has left him no alternative. "It's the end of sofa government," smiled one Whitehall mandarin.

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