Parliament and Politics: Benefits targeted in drive to limit spending

The Government is poised to cut or freeze increases for millions of pensioners and income support claimants in its attempt to peg public spending next year to pounds 244.5bn.

An emergency legislative package to break the statutory link with the cost of living, which would raise pensions and a range of other key benefits next April, is under preparation as a fierce battle is being fought in Cabinet.

Although ministers say nothing has been decided, the Treasury believes stopping the rises in pensions, income support and other social security benefits is 'the simple solution' to the Government's public spending problem.

Rising unemployment is expected to push social security spending up beyond the pounds 71.2bn budgeted for next year. Cutting increases in pensions and income support would cause a huge political row - but would go a long way to solving the pounds 3.5bn in excess bids that the Treasury faces.

Pensions would normally rise automatically through the statutory link to September's inflation rate, which is due out on Friday and is expected to be around last month's 3.6 per cent. Freezing the increase for almost 10 million state pensioners would save perhaps pounds 900m, while doing the same for 4.8 million claimants on income support would save around half that. If the Treasury cannot achieve a freeze, it may settle for a 2 per cent rise - a figure which would underline what is thought to be ministers' aim for public sector pay next year.

Despite Peter Lilley's image as a Thatcherite Cabinet minister at Social Security, the moves by Michael Portillo, Chief Secretary to the Treasury, are said be being fought 'with some vehemence'. The Treasury, however, has closed in on basic benefit rises after ministers agreed that John Major's manifesto commitment means child benefit will have to be increased. Savings from housing benefit have proved hard to engineer, and while Mr Portillo still wants the duration of unemployment benefit cut from 12 to 6 months, the net savings are small - perhaps only pounds 250m - as many claimants would simply fall back on income support.

Norman Lamont, the Chancellor, chaired a two-hour meeting of the Cabinet committee on expenditure, the EDX committee, to finalise the cuts before the Cabinet goes to Brighton for the annual party conference. Capital schemes, including roads, defence and housing, are among the victims.

The Chancellor was not planning to use his keynote speech to the conference on Thursday to spell out his monetary policy. But the continuing pressure on the pound could force him to fill the vacuum in the policy which has existed since sterling was withdrawn from the exchange rate mechanism.

Sir Norman Fowler, the party chairman, said the Tory rank and file would support the Government on its economic policies, its decision to withdraw from the exchange rate mechanism, and the decision to press ahead with the Maastricht treaty ratification.

The Prime Minister will reassert his authority over the party rebels who are campaigning at the conference against his decision to go ahead with ratification of the Maastricht treaty. John Major told a dinner for party agents last night that he intended to remain firm on Maastricht. His European policy was designed to protect British interests.

Sir Norman will call for unity today with a sideswipe at those in the party who are hankering for the return of Baroness Thatcher, who is due to arrive tomorrow. Lord Tebbit, the former party chairman, said she would not speak at Brighton. 'There is a political and economic crisis in this country. She doesn't wish to make matters worse for the Prime Minister.'

Sir Norman will say the party had problems under the former Prime Minister. The real lesson from her time in office is that the Government should not run away from problems.

In a clear reference to anti-Maastricht Tories, Sir Norman will say there may be criticism from within the party, but that does not mean the policies being pursued are not right.

He will warn the conference that the party will win through only if it stays united, and that Labour became unelectable in the 1980s because it was divided. But as a sop to the anti-Maastricht campaigners, Sir Norman will make it clear the Government is absolutely opposed to a federal Europe and their fears that it will be conceded by the Maastricht treaty are unfounded.

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