Tory think-tank urges cuts in health budget

George Osborne is being urged today to cut health spending by £20bn, reduce state benefits by £13bn and increase VAT to eliminate the £155bn public deficit in four years.

Reform, an independent think-tank with close Conservative links, issued its report as the Chancellor finalises next Tuesday's Budget.

Tonight Mr Osborne will reiterate the need for tough action to tackle the deficit in his annual Mansion House speech. It will be devoted mainly to announcing a new regulatory system in which the Bank of England will be in the driving seat and the role of the Financial Services Authority downgraded.

Some Tory ministers and backbenchers are privately sympathetic to Reform's call for the health budget to be reduced. So are the Liberal Democrats, who said at last month's election that no departments should be exempt from cuts. But David Cameron wants to retain the Tory pledge to raise NHS spending, which he sees as a vital element in his attempt to rebrand his party.

Rather than cut the NHS, Mr Osborne is thought more likely to adopt Reform's plan to curb so-called "middle class welfare". Today's report proposes reduced spending on child benefit, child tax credit, the winter fuel allowance for pensioners and other family benefits such as the health in pregnancy allowance.

It outlines plans to shrink the deficit to £5.9bn by 2014 by cutting £18bn from the Civil Service and police, £12bn from schools and universities and £9bn from business support while the motorway network should be privatised, it says. It recommends a further £4.6bn should be raised from higher taxes – including a controversial proposal to end exemptions for VAT on items such as food, children's clothes, energy and new homes, with protection for the poorest families. Reform called for the abolition of Labour's 50p higher rate of income tax and its cuts in pensions tax relief for high earners.

Andrew Haldenby, Reform's director, said: "Ministers should ignore the special pleading from organisations who are already arguing for 'their' bit of public spending to be protected."

Derek Scott, former economic adviser to Tony Blair and a member of Reform's advisory board, said: "Those people arguing for retaining a 'Keynesian' stimulus until recovery is 'secured' rather than cutting expenditure now have a pretty odd reading of Keynes. Keynes might have considered a deficit of 3 per cent tolerable, but not 12 per cent."