Portillo warns of deep spending cuts to come: Major discounts report that better-off pensioners will have to pay for prescriptions but Tory supporters likely to bear cost of reduced benefits

DEEP and potentially unpopular public spending cuts are on the way, Michael Portillo, the Chief Secretary to the Treasury, warned last night.

John Major dismissed as premature a report that millions of better-off pensioners and parents might lose their pounds 1bn entitlement to free prescriptions, saying 'those stories always abound' when public spending was under scrutiny.

Nevertheless the Prime Minister told Channel Four News that Mr Portillo's expenditure review was 'going right down to the roots . . . . What we have to bear in mind is that it isn't our money we're spending; it's the taxpayers' money we're spending, and we have an obligation to get the best possible value for it. That's what we're looking at.'

Mr Portillo, a young lion of the Thatcherite right, went further in a speech to the Association of Investment Trust Companies, arguing 'the Government's wake-up call from the electorate two weeks ago' had been a protest against high public spending.

Later, he appeared not to rule out the report about prescription charges, telling ITN's News at Ten: 'My job is to look at all sorts of options. We are going to face some tough decisions. I don't think that is one of the leading options.'

With jittery Tory backbenchers and protective ministers in his sights, Mr Portillo said in his speech that many people found it easy to back spending restraint in general, but harder to support the individual cuts required to deliver the overall objective. 'Containing public spending means courting unpopularity. It requires political sensitivity in judging which should be the priority areas. It requires endless vigilance, seeking out those elements of spending that no longer relate to today's priorities.'

However, he added: 'The prospect does not frighten me. The threats posed by excessive spending and borrowing are serious. It is our duty to hide nothing and to tell it as it is . . . Something will have to give.'

If Mr Portillo and the Chancellor get their way, the problem to be faced by the Government and Tory MPs is that if the community's poorest sections are to be protected from cuts, the Tories' bedrock supporters could be asked to pay the penalty in terms of cuts in benefits and services.

Explaining the imposition of value- added tax on domestic fuel and power bills, Mr Major told BBC radio's Jimmy Young yesterday that it had been necessary to raise resources to curb government borrowing. 'It's the people who are above the poorest level who will make the principal contribution,' he said.

In his speech, Mr Portillo said this month's local and by-election reverses had not been prompted by a lack of government spending. 'Rather, spending is part of the problem. Over the last three years, Government spending has risen by 13 per cent in real terms.'

He said the scale of the public sector borrowing requirement, projected at pounds 50bn this year, could not and should not be corrected 'solely by raising taxes . . . . If we relied simply upon increasing tax revenues to tackle deficits of the scale we face, that would require huge increases in tax rates.' They would 'throttle' economic activity and create unemployment - as would the higher interest rates that would result from continued government 'profligacy'.

In the five years to next April the Government would have increased spending by more than pounds 100bn. Mr Portillo said that could neither be justified nor sustained. He said they could not rest once the PSBR was cut from 8 per cent of gross domestic product to a target 3.75 per cent in 1997-98. This time the balance would be redressed by spending cuts, rather than tax increases.