Cabinet threatens Ulster funds

HUNDREDS of millions of pounds could be slashed from government spending in Northern Ireland, Scotland and Wales under plans for a change in public spending rules proposed by the Chief Secretary to the Treasury, Jonathan Aitken. The move goes hand in hand with pressure for a 'peace dividend' in defence savings in Northern Ireland if the IRA ceasefire holds.

Treasury ministers are also keen to review government spending within the province in view of the anticipated influx of aid and investment from the United States.

Mr Aitken, who was promoted into the Cabinet in June, wants to get rid of the formula which allocates money automatically to each government department as a proportion of spending in England. He put forward a series of arguments for reduced spending at a bilateral meeeting with the Secretary of State for Northern Ireland two days ago.

However, the Scottish Office would inevitably be the biggest loser from a change in the formula. Treasury ministers believe that pounds 1bn could be cut from the budget of Ian Lang, Secretary of State for Scotland.

Under present arrangements 96.5 per cent of Mr Lang's spending comes out of the Scottish 'block expenditure'. That is allocated to the Scottish Office on the basis of 10.66 per cent of comparable English programmes. Similarly Wales receives 6.02 per cent and Northern Ireland 2.87 per cent - not including security funding which comes out of the Ministry of Defence budget.

This system has long been anathema to the Treasury because it means, effectively, that the three 'territorial' government departments never have to justify their spending programmes.

When Treasury ministers assembled before the summer break at Chevening to consider the broad outline of this November's budget and autumn statement, the formula was targeted as an area for reform. The Treasury feels it is in a strong position because it is reviewing all government spending, and because the changing security position in Northern Ireland demands a thorough examination of funding. With Conservative fortunes at a low ebb in Scotland and Wales, the Conservatives have less to lose from making cuts, some ministers believe.

That raises the prospect of a fierce Whitehall battle raging into the autumn. Mr Lang is resisting efforts to remove the formula and is confident he will win. The dispute, however, is said to be nowhere near resolution.

Sir Patrick Mayhew, the Northern Ireland Secretary, argues that government support for social programmes, including job creation and house- building, has been vital in deterring people from terrorism. He also points out that if the situation improves, many people employed in the security forces will have to be found alternative work.