Spending axe poised over NHS: Welfare State faces its biggest shake-up

THE National Health Service is to be in the front line of the Treasury's searching examination of public spending ordered by John Major, government sources revealed last night.

The disclosure that Health would be one of the first four departments to come under the most rigorous state spending review for a decade came as Peter Lilley, Secretary of State for Social Security, confirmed that ministers were examining ways that the private sector could provide some benefits now provided by the state. The review could lead to the biggest shake-up of the Welfare State since its creation in the 1940s.

In social security, the review could pave the way to large-scale opt-outs from National Insurance payments. At present, these are made by everybody in work and provide unemployment and invalidity benefits and old-age pensions. Eventually, employees could be excused payments and allowed to take out private unemployment insurance or the better off could 'buy' all of their old-age pension from the private sector.

Besides Health and Social Security, the departments to come under the immediate scrutiny of Michael Portillo, Treasury Chief Secretary, are the Home Office and Education. The review, testing every spending item, could affect this year's spending round but, ministers emphasise, it may not be completed until the end of the Parliament. It may have a greater impact on the next Tory manifesto than on spending in this Parliament.

At the Young Conservatives conference in Southend yesterday, Mr Lilley said that contracting out of the state earnings- related pension scheme had been a success 'and something we can build on'. Asked about contributory benefits - pensions, unemployment and invalidity - he said he was anxious that 'private provisions can be better harnessed'. In an apparent reference to possible changes in child benefit, Mr Lilley said manifesto commitments were 'not broken lightly'. This suggests that the Government might tax child benefit before the general election, or include a pledge in the next manifesto to put it to a means test - hitherto opposed by Mr Major.

Virginia Bottomley, the Health Secretary, also in Southend yesterday, committed herself to greater involvement of the private sector in her department's work. She wanted to break down the 'apartheid' between public and private in health.

Mrs Bottomley said: 'If better and more cost-effective patient care means drawing on private sector skills, discipline and investment, then let it be.' She promised that the central principle that the NHS was available to all, regardless of ability to pay, 'cannot and will not be breached'. But she added: 'The private and voluntary sectors should be regarded as partners and not pariahs.'

The spending reviews will send a firm message to the markets and Tory backbenchers that Mr Major intends to tackle the pounds 54bn borrowing requirement by curbing public spending rather than by tax increases.

Gordon Brown, the Shadow Chancellor, described the reviews last night as a 'panic policy shift' promoted by the extreme right within the Cabinet.

Senior ministers were playing down the prospects of a high-cost, large-scale employment package before or at the same time as the Budget. One suggested that growth remained the best way to create jobs and that too large an employment programme might undermine economic confidence. But Mr Major is to meet members of the ministerial group on employment to discuss limited measures aimed at helping the unemployed.

One being discussed is a change in benefit rules that prevent claimants doing voluntary work or taking further education courses because they breach the 'available for work' criteria applied by the departments of Employment and Social Security.

Ministers emphasised that examination of workfare-style schemes in which useful work becomes a condition of benefit was for the longer term and could involve a wide range of projects. The idea, floated by Mr Major last Wednesday, has long been advocated by Michael Heseltine, Trade and Industry Secretary.

More than half of Tory backbenchers think that Norman Lamont should quit as Chancellor after he delivers his Budget next month, according to a poll by Channel 4's Week in Politics. Of 84 backbenchers, 44 said he should go. Michael Howard was the favourite successor with 20 supporters.

JOHN SMITH, in his most important speech since he became Labour leader last summer, will today tell the Labour local government conference that Labour must become the party of the individual citizen and consumer and reject the dogmas of its past. The speech will mark a conscious break with Labour's long tradition of collectivism.

Full story, page 2