Michael Portillo: How I will cut public spending to provide money for lower taxes

'My job is to return some taxpayers' money whilst providing more funding for the things we all care about'

The government currently spends about £12,000 of taxpayers' money a second. My job, as the next Chancellor of the Exchequer, will be to return some money to taxpayers whilst at the same time providing more funding for the things that we all care about, like health and education.

The government currently spends about £12,000 of taxpayers' money a second. My job, as the next Chancellor of the Exchequer, will be to return some money to taxpayers whilst at the same time providing more funding for the things that we all care about, like health and education.

Five principles guide our approach to government spending.

First, government should only spend what the nation can afford.

This is the most important principle. It is difficult to imagine any government being foolish enough to spend more than the nation can afford. Yet that is precisely what the present government is doing. Gordon Brown is planning to increase total government spending by around 3.4 per cent a year over the next three years, even though he assumes that the economy will only grow at around 2.25 per cent.

That is why he has had to increase taxes at such a rate in this parliament, and it is why, should Labour be re-elected, he will go on increasing taxes in the next parliament.

The next Conservative government will plot a course towards real annual increases in spending which are within the trend rate of growth of the economy. In other words, we will only spend what the nation can afford.

Second, government should not spend more than it needs to do the job.

Under Labour, the running costs of government have increased by nearly £2bn with no improvement in government services to show for it. This is a waste of money. The next Conservative government will reverse the increase in the cost of government. Our administrative budgets will be calculated on the assumption of a freeze in recruitment. A crude freeze may not be the most effective way of reducing costs, so we'll let the permanent secretaries determine exactly how those savings should be found within their new budget.

Politicians should set an example, because there are far too many of us. We'll cut the number of ministers, reduce the size of the House of Commons and halve the number of political advisers to ministers.

In total, the next Conservative Government will expect to find at least £1.8bn worth of savings from the running costs of government by the financial year 2003-4.

Very occasionally, some areas of government need more money to do the job. For example, the Home Office needs more spent on immigration and asylum casework, and we will re-allocate some of the department's savings in that direction.

The Department of Social Security will need to spend some of its savings on the major new anti-benefit fraud measures we will implement. For instance, we're going to set up a single benefits investigation squad, a national body that would have responsibility for investigating all forms of welfare fraud administered by the Benefits Agency. Common sense measures like these will yield at least £1bn in savings by 2003-4.

Third, government should only do what it is necessary for it to do.

We should not be spending great sums of taxpayers' money on subsidising e-commerce - probably the one sector of industry in the world least in need of subsidy. There are a host of other DTI schemes that do not achieve very much, such as money spent on advertising export promotion and on the Government's attempts to act as a venture capitalist.

We will get rid of them, and instead focus the DTI on what it should be doing: cutting business tax and red tape. From these changes will flow £300m of savings by 2003-4.

Fourth, where it is necessary for the Government to act, it isn't necessary for the Government to provide everything itself.

Look at the expensive, ineffective New Deal. Not only does it cost the taxpayer over £20,000 for every job found, but half of those helped end up losing their jobs within nine months.

We will replace the New Deal with a scheme called Britain Works, where the Government pays private contractors a fee to find a job for an unemployed person, and then pays them a further success fee if the person stays in the job they've found for them. A similar scheme in America has proved a great success at finding long-term employment. Not only will unemployed people have a much better chance of finding lasting, worthwhile work, but because Britain Works only costs the taxpayer £3,000 per job found, the scheme will save the country £400m a year by 2003-2004.

Similarly, huge improvements can be made to the standard of public housing by accelerating the transfer from councils to voluntary housing associations. There is no reason why instead of taxing business to pay for Industrial Injuries Benefit, we should not instead require companies to take out their own commercial insurance to cover against injuries to their employees. Companies would then have real incentives to improve their safety record. These reforms have the added advantage of yielding £450m in savings by the year 2003-4, and even more in the years after that.

Fifth, government should encourage personal responsibility and choice.

The best way to help unemployed and unskilled people is to give them every incentive to find work and, with it, new skills and self-esteem. That is why we will require unemployed people who can work, and who are offered a job, to take that job or lose their unemployment benefits.

We will also encourage lone parents whose children are at secondary schools to find work. All the evidence shows that the children of lone parents are much more likely to achieve themselves if their parent provides a role model by having a job. So we will remove unconditional Income Support payments to lone parents whose youngest child is over 11 years old.

Not only will these changes to welfare payments help create a culture of personal responsibility where if you can work, you do work, but we will also save £900m by 2003-4.

By using the five principles that I have listed, we have identified over £5bn in savings by the year 2003-4. Further announcements over the next few months are expected to bring total savings of around £8bn, which we will then give back to hard-working families, pensioners and businesses by lowering their taxes.

And because we have specifically identified where the money is coming from, we can reassure people that we will be able to increase spending on our schools and the NHS in the same way as Labour proposes.

The writer is the shadow Chancellor of the Exchequer