NHS to be first victim of Major's state spending review

THE NHS 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 view for a decade came as Peter Lilley, Secretary of State for Social Security confirmed ministers were examining ways that the private sector could provide a range of benefits currently provided by the state. The review could eventually lead to the biggest shake-up of the welfare state since its creation in the 1940s

In social security, the review could in the long term pave the way to large-scale opt-outs from national insurance payments which currently provide unem-loyment and invalidity benefits and old-age pensions. This could mean employees taking out private unemployment insurance, for example or 'buying' their old age pension from the private sector.

Besides Health and Social Security the other departments to come under the immediate scrutiny of Michael Portillo, Treasury Chief Secretary are the Home Office and the Department for Education. Mr Portillo will meet his Cabinet colleagues runnning each department before subjecting them to a fundamental examination which will challenge every heading of expenditure.

Although the review could affect this year's spending round Ministers were at pains to stress that it was seen as a long term exercise which might not be completed until the end of the Parliament.

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

Mrs Bottomley told reporters after addressing the Young Conservative conference in Southend 'If better and more cost effective patient care means drawing of private sector skills, discipline and investment then let it be.' Mrs Bottomley promised that the central principle that the NHS was available to all regardless of their 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.'

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 that said he was anxious that 'private provisions can be better harnessed'.

In an apparent reference to possible changes in child benefit, Mr Lilley said that manifesto commitments were 'not broken lightly'. The hint will be taken as a sign that the Government could consider taxing child benefit before the general election or including a pledge to means test it - hitherto opposed by the Prime Minister - in its next election manifesto.

Although it was stressed in Whitehall that every department would eventually be subjected to the Portillo scrutiny, in the short term the selection will come as a relief to other high spending departments, including Environment and Defence. The latter is however already within the remit of another high level review of Britain's world role, also ordered by John Major. Officials also pointed that the new public spending system in which specific cash targets were set in advance meant that the previous system of 'zero based budgeting' in which every item of expenditure was questioned in every spending round, no longer applied in the same way. The new review would help to fill the vacuum, ensuring the Treasury's right to 'open the books' of every department.

Within the Tory party, the Prime Minister's move, foreshadowed in his speech to the Carlton Club on Wednesday, will be seen as a sending a firm message to the markets and to his own backbenchers that he intends to tackle the pounds 54bn borrowing requirement by curbing public expenditure rather than by tax increases.

Senior ministers were last night playing down the prospects of a high-cost, large scale employment, package before or at the same time as the Budget. One suggested last night that growth remained the most valid method of creating jobs and that too large a jobs programme might undermine economic confidence. But the Prime Minister is to meet members of the ministerial group on employment chaired by Lord Wakeham to discuss a limited series of measures aimed at helping the unemployed.

One measure being actively discussed is for changes to benefit rules which currently 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. At the same time, the group has been considering further expanding training for work and business start up schemes, beyond that already announced at the same time as last November's Autumn Statement.

Mr Lilley also encouraged those ar-uing for workfare by saying that 'we must also encourage those who can to help themselves'. Ministers stressed that examination of workfare type schemes - in which useful work becomes a condition of benefit - was for the longer term and could involve a wide range of different projects for the long term unemployed. The idea, floated by the Prime Minister last Wednesday has long been advocated by Michael Heseltine, Trade and Industry Secretary.

Gordon Brown, the Shadow Chancellor, said last night that the public spending review was a 'panic policy shift' promoted by the 'extreme right' within the Cabinet. He said Mr Major had said at the time of the election that he saw 'no reason' why the Tories should not meet their spending promises.