Why Major's tax promises just don't add up

If you want to cut taxes, one obvious place to start is to cut spending. But how can the Government impose the Prime Minister's promised "ruthless" spending cuts while maintaining its claim to be the protector of the common wealth, thereby refuting Alan Howarth's damaging accusation? Only with immense difficulty.

For since 1979, government spending, far from rolling back the welfare state, has come to concentrate on it. In the year the Conservatives took office, 53 per cent of spending went on health, education, social security and housing. Since then, spending on council housing and defence has been cut, and money has been raised and costly subsidies ended by selling off the bulk of the nationalised industries.

Despite this, the pressure of higher unemployment and an ageing population, plus the priority given to law and order, have helped ensure that virtually two-thirds of government spending goes on the welfare state.

In housing, capital spending has been cut. But the policy of reducing revenue costs by driving up rents has had such a dire effect on the housing benefit bill and on discouraging benefit recipients to take low- paid jobs that the Government has called a halt. Rent increases of 5 per cent a year in real terms are being wound down. And for the first time since 1990, housing associations are not being asked to raise a higher proportion of their capital from private finance - another factor that has been pushing up rents.

In other words, the policy of cutting public spending on housing appears to have run its course - unless a U-turn on recent government decisions is to be made.

On health, the Government is pledged to raise real-terms NHS spending each year - a promise Stephen Dorrell, the Secretary of State for Health, was underlining again only yesterday. No cuts there without a broken manifesto promise.

Education is the Government's current top priority, and one of three areas (the others were health and law and order) that John Major promised to protect in his speech on Monday night to party agents.

This, in a search for really substantial cuts, leaves only social security - the pounds 90bn bill that accounts for approaching 30 per cent of all government spending, and is the right's favourite target. Here, Peter Lilley, the Secretary of State, has already been busy. A range of measures, including cuts to Serps, raising women's pension age to 65, introducing the Jobseeker's Allowance and the new invalidity benefit, have cut social security spending by a projected pounds 4bn a year by 2000, and by pounds 14bn a year by the middle of the next century. His approach, in the main, has been to reduce the numbers entitled to claim, rather than to cut benefit rates. This produces results - but far too slowly to allow big tax cuts before the next election.

The quick fix would be to cut the cash sums paid. But Lilley has resisted that. Current benefits do not let claimants live the "life of Riley", he has said. When people say "come on, surely you can cut pounds 5bn from pounds 90bn", Lilley's on-the-record response has been: "Well, pounds 5bn is 1 million people losing pounds 5,000 a year, or a larger number losing smaller sums, or fewer losing even more. And we don't want to take money away from people for whom it is intended. There's no justification for that."

There is, of course, the drive against fraud - now a cross-party objective. Recent government research suggests there is pounds 1.4bn of fraud a year in income support and unemployment benefit alone - a billion of it accounted for by people claiming while they are working, or claiming to be single while living together. New order books, computers and, in effect, social security identity cards will cut that, probably by several hundred million over two to three years - enough for 0.5p off the standard rate of tax. Serious money, but no panacea: such sums are more than offset by the inevitable upwards pressure from rising numbers of elderly.

So to really cut spending, something radical will have to be done. The options are well known. Child benefit could go, but it is protected by a manifesto pledge. There are school vouchers, which parents would have to top up, but that idea is "rubbish", according to Gillian Shephard, the Education Secretary. Tax breaks for private health insurance or charges for hospital stays have repeatedly been ruled out. Loans for student tuition are not even on the agenda, and would be unpopular. Using National Lottery cash for the pounds 300m arts programme is small beer and was ruled out yesterday. Or there is privatising more of social security - industrial injuries, for example, or unemployment and invalidity benefit - all of which are difficult and unlikely to produce short-term savings.

The Government is caught in the same box that all governments face: past commitments heavily dictate future spending and there are no short- term panaceas. Labour faces the same difficulty, and its one suggestion to date of a cut is taxing child benefit, something that might save a few hundred million from a pounds 6bn bill.

Good housekeeping, competitive tendering and using private, rather than public, capital look to remain the chief routes to constraining public spending in the short term, unless the Government takes another leaf out of the radical right's book. Growth - producing more tax revenue and lower spending on unemployment - remains the painless way to tax cuts.