The options being studied by ministers include cutting unemployment benefit from a year to six months, and targeting other benefits, possibly by taxing them, to restrain the demand-led social security budget, due to rise from pounds 66bn to pounds 74.5bn by 1994-95.
Gillian Shephard, the Secretary of State for Employment, will cut short her holiday in France on Thursday to defend the Government over the latest unemployment figures, which are expected to show a substantial rise.
Ministers have admitted privately that it would be difficult to defend cutting unemployment benefit while the jobless total is still rising. The Prime Minister's office firmly ruled out making any changes for next year. But ministers are prepared to make changes in the future. About 600,000 people have been unemployed for between 6 and 12 months.
'There is a lot of support within the party for making people seek work,' said one ministerial source. This could involve working for benefits, based on Workfare, the US system of withholding benefits from people who refuse either offers of jobs or training.
Such a system is known to be favoured by Michael Heseltine, President of the Board of Trade, and a member of the Cabinet committee which has been set up to keep total government spending within fixed ceilings.
In a clear signal that action is planned, Downing Street confirmed that two members had been included on the committee because of the possible changes to entitlements, which would require legislation.
It had been thought that Tony Newton, Leader of the Commons and a former secretary of state for social security, and Lord Wakeham, a former chief whip, had been included because they were 'neutral' ministers with no large departmental budgets.
Robin Cook, Labour spokesman on trade and industry, said: 'Why should victims of Norman Lamont's recession now have to pay twice as a result of his cuts? They have already lost their jobs and some have lost their homes. It's a bit rich now to consider ways of cutting their benefits.'
The committee, chaired by Mr Lamont, the Chancellor, will hold its first meeting next month. Its task will be to cut pounds 14bn in excess bids by Cabinet colleagues to meet the agreed total of pounds 244.5bn in public expenditure for the next financial year.
Conservative Party leaders expect the cuts to be deepest in the roads programme and defence, and some ministers are predicting cuts in capital spending on health, with new hospitals delayed. The decisions, which will have to be endorsed by the full Cabinet, will be announced after the Chancellor's Autumn Statement.
Other members of the committee are Michael Portillo, Chief Secretary to the Treasury, who is conducting the annual public expenditure survey round; William Waldegrave, the Cabinet minister for the civil service; and Kenneth Clarke, the Home Secretary, the only minister with a large budget to protect.
The strict limits on spending in future years are intended as a signal to the City that the Government is determined to rein back public expenditure and reduce the Public Sector Borrowing Requirement, expected to exceed the forecast of pounds 28bn this financial year.
Downing Street warned that the unemployment figures out this week were likely to be higher because earlier, unexpectedly low, figures would 'bounce back' as a result of the difficult seasonal trends caused by the recession.
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