Spending faces 'toughest round for 15 years'

DOWNING STREET last night warned that ministers were facing the toughest squeeze on public spending since the cuts imposed on the last Labour government by the IMF, after the Cabinet agreed to hold spending to the figures fixed last year.

The Prime Minister told the Cabinet to 'sing from the same hymn sheet' to avoid divisions over whether taxes should be increased to ease the spending squeeze.

The Cabinet met as official figures pointed to a low-inflation recovery after unemployment dropped for the fourth month in succession, car production surged and inflation remained at 1.3 per cent, its lowest rate for almost 30 years.

The number of people out of work and claiming benefit fell by 26,100 in May to 2,913,800, the largest one- month decline since September 1989. Despite the lingering concern of some City analysts over the reliability of the figures, the 78,500 decline since February suggested the upward trend since 1990 may have halted.

Ministers agreed to fix the ceiling for spending at pounds 253.6bn for next year to underline determination to tackle the pounds 50bn public deficit and reassure the City. 'It will be the toughest spending round for 15 years,' said the Prime Minister's Office - a claim that aroused widespread scepticism.

Next year's total is pounds 10bn more than this year - an increase of 4 per cent, or more than double the rate of inflation, suggesting Kenneth Clarke, the Chancellor, is seeking to pay for public expenditure by growth in the economy. John Townend, the Thatcherite chairman of the backbench Tory finance committee, said: 'It means there will be no public expenditure cuts.' He warned Mr Clarke that the back benches would not accept massive tax increases.

Officials said the increased take-up rates for social security benefits and the rising cost of the elderly have tightened the squeeze. The Cabinet decided growth in spending should be lower than the growth in the economy over the next three years.

Tax-raising options include freezing allowances, raising National Insurance contributions and extending value-added tax to include water charges or passenger transport.

The Cabinet also lifted the traditional pre-Budget purdah on Mr Clarke, to enable the Government to counter the expected summer of speculation over cuts.

Yesterday's figures also pointed to weak wage and price pressures. The annual rate of inflation stayed unchanged at 1.3 per cent in May, while earnings in manufacturing industry held steady at 5 per cent in the year to April. Compared with a year ago, wage costs per unit of output improved at the second fastest rate since 1970 in the three months to April.

Clarke heads task force, page 8

Leading article, page 21

Jobs, inflation details, page 25

View from City Road, page 26

Hamish McRae, page 27