Treasury fears Major will reject cutbacks

THE TREASURY is worried that its efforts to control the Government's deficit will be foiled by the reluctance of the Prime Minister to accept radical spending cuts.

The Treasury has set up a rolling long-term review of departmental spending. However, a senior Treasury official said last week: 'We have been losing a series of battles with Number 10. They are not yet convinced that more has to be done.'

The Treasury is hoping that the review, co-ordinated by Michael Portillo, the Chief Secretary, will yield savings in this year's spending round. It fears that November's 'unified Budget', the first combining tax and spending measures, will be the main opportunity to take tough decisions on spending before pre-election caution sets in.

But one Treasury minister said the omens were not good. He believes Number 10 will probably block politically sensitive spending cuts this year.

The Treasury's worries emerged as the Chancellor told the International Monetary Fund's policymaking committee in Washington that 'a reduction in borrowing is vital if the recovery is to be sustained'. Norman Lamont said he would keep spending within the ceilings set in last year's Autumn Statement. Most spending not affected by the level of unemployment - the New Control Total - is projected to rise by pounds 10bn between this financial year and 1994/5 to pounds 254bn.

Most economists believe the Government will need to announce further tax increases or spending cuts in November, to convince the City that borrowing will be controlled. The Treasury forecasts a borrowing requirement of pounds 50bn this financial year, equivalent to 8 per cent of national output. The PSBR is still projected to be 6.5 per cent of national output in the following year. The Treasury believes a significant proportion of the PSBR is 'structural', so it will not fall automatically as economic recovery boosts tax revenues and cuts benefit spending.

Mr Portillo is focusing on health, education, social security and Home Office spending. He has asked the departments to come up with proposals in time for the June cabinet meeting, which will discuss overall spending strategy.

Pressure on government spending would be eased if the falls in unemployment in February and March are maintained, reducing spending on benefits. Treasury officials believe that public spending rises by around pounds 700m a year for each 100,000 people who join the dole queue.