Ministers asked to plan for 40 per cent cuts

LONDON - Cabinet ministers have been ordered by the Treasury to plan for unprecedented cuts of 40 per cent in their departmental budgets as the British coalition widens the scope of its four-year austerity drive.

The eye-watering demand from the chief secretary to the Treasury, Danny Alexander, was sent this weekend to Cabinet colleagues ahead of a week in which ministers will step up emergency cost-cutting across the public sector. The only departments not included in the Treasury trawl will be health and international development, which have been "ring-fenced" for the current Parliament. Education and defence will also escape lightly.

Alexander has told the Education Secretary, Michael Gove, and the Defence Secretary, Liam Fox, to plan for two scenarios - cuts to budgets of 10 per cent at best and 20 per cent at worst over four years.

All other departments - including the Home Office, the Department for Work and Pensions and the Department for Transport - have been ordered to produce plans showing the impact of cuts of 25 per cent, and at worst 40 per cent.

It is estimated that a 25 per cent cut in the Home Office budget could mean a reduction in the number of police officers of almost 20,000.

In addition, all departments have been asked to show how they would slash day-to-day administration costs, excluding salaries, by 33 per cent at the lower end and 50 per cent at the higher.

A Treasury source said: "We are determined to tackle the record budget deficit in order to keep interest rates lower for longer, protect jobs and maintain the quality of essential public services. These planning assumptions are not final settlements, and do not commit the Treasury or departments to final settlements."

In the Budget last month the Chancellor of the Exchequer, George Osborne, said that, with the exception of health and international development, departments faced average cuts of 25 per cent. But it was expected the pain would be spread fairly evenly.

Alexander and Osborne briefed the full Cabinet at a meeting last Wednesday. They stressed that asking ministers to look at the impact of 40 per cent cuts did not mean they would be hit by such harsh settlements when final details were announced in the full spending review on October 20. Sources were at pains to point out that Labour had been planning cuts of 20 per cent and that as a result the coalition's settlement would mean more for education, defence and health.

The announcement of a 40 per cent outer limit could be seen as tactical - to prepare the public for the worst in the hope that when final details are announced they will come as less of a shock.

In a sign of how determined ministers are to act fast, the Government is expected this week to halt the rebuilding of around 700 schools in order to save a further £1 billion ($2.2 billion) a year. And in a move that will cause bitterness among the Whitehall mandarins drawing up the cuts, ministers intend to announce plans soon to slash payoff terms for hundreds of thousands of civil servants, many of whom fear redundancy as a result of the austerity measures.

Last week it emerged that at least 600,000 public service jobs could be lost.

The Observer understands that the Cabinet Office minister, Francis Maude, wants to pass legislation to change the long-standing Civil Service Compensation Scheme, which he sees as too generous. In some cases civil servants can leave with a payoff of six times their salary, though insiders say these are rare exceptions. An attempt by the previous Government to change the compensation scheme failed after a successful union challenge in the High Court.

Sources told the Observer that an announcement - which could lead to union threats of strike action - had been pencilled in for last Friday and is now expected this week or next. Representatives of the main civil service unions have been called to a meeting at the Cabinet Office tomorrow.

Ministers were also warned last night that the number of people classed as homeless in Britain could more than double because of "unfair" benefit cuts. "Cutting housing benefit could have a catastrophic impact on the lives of thousands of people who - despite their best efforts - have failed to find work after 12 months," said the federation's chief executive, David Orr.

- OBSERVER