Ministers battle Treasury over how to spend savings

Welfare, schools and defence emerge as key areas in dispute over whether to retain cash or spend it on reducing deficit

Ministers charged with finding savings on welfare and defence are battling the Treasury to retain more of the cash, rather than see the billions spent on reducing the £160bn deficit.

The disputes, across a number of Whitehall departments, are pitching some leading Liberal Democrats into difficult arguments, as welfare, schools and defence emerge as key flashpoint areas ahead of the autumn spending review.

The prime minister David Cameron said he was determined to act against £5.2bn welfare and tax credit overpayments, describing this as the "one area of ingrained waste that outranks all others". Some of the cuts would be painful, he said, and would mean that "things that we genuinely value will have to go because of the legacy we have been left".

Work and pensions ministers today conceded the high fraud and error figures highlighted by Cameron, but argued most of the projected savings from reducing these – mainly from introducing new real-time earnings data – should be retained by the department.

They want to use most of the savings to fund a universal credit system they argue would improve financial work incentives, minimise cash going to wealthier claimants and reduce overpayments and fraud. But the Treasury says a new system is unlikely to be ready for at least two years and is dubious that the savings can be found. It has already pressed the Department for Work and Pensions to reduce benefit levels, possibly freezing them in line with freezes in public sector pay.

Cameron was forced to quash proposals to remove universal free milk from under-5s after the plan was leaked. The savings of only £50m put forward by health minister Anne Milton were ditched by the PM, concerned that it would remind voters of "Thatcher the milk snatcher", a phrase coined 40 years ago portraying the Tories as the uncaring party.

In what looks like part of an intensive process of softening up the welfare budget for cuts, Cameron wrote in the Sunday Times that many see welfare overpayments "as a fact of British life that we have no hope of defeating. I passionately disagree. Simply shrugging our shoulders at benefit fraud is a luxury we can no longer afford – which is why Iain Duncan Smith is working on the radical steps we can take to deal with it".

Some coalition ministers point out that of the £3.1bn of identified fraud and error in the benefits system in 2009-10, only £1bn is attributable to fraud, as opposed to system failure. Of the £2.1bn identified in the tax credit system in 2008-9, only £460m is attributable to fraud.

A similar dispute is emerging in the department of education over how much the department itself must find the savings to fund plans for a pupil premium, aimed at the poorest pupils and set to cost £2.5bn a year by 2015.

Sarah Teather, the Lib Dem children's spokeswoman, has insisted that the coalition agreement means the extra money – possibly worth less than £1,000 per disadvantaged pupil per year – will come from outside the existing schools budget.

Teather has said: "This is a real Liberal Democrat achievement. It was the centrepiece of our education policy during the election campaign, and it is now being implemented in government. While the Conservatives had a similar policy, it was the Lib Dems who pushed for it to be funded from outside the schools budget."

Some Lib Dem MPs are questioning how Teather can guarantee that the pupil premium will be funded entirely from outside the schools budget when other parts of the education budget will be cut.

At the Ministry of Defence, ministers are denying that they have decided to appeal over the head of the chancellor to protect the defence budget in face of Treasury demands that the ministry find savings itself to fund the capital cost of Trident. But the issue of whether the £20bn capital cost, as opposed to its current costs, should be funded by the MoD or the general taxpayer remains unresolved.

The chancellor George Osborne said: "I have made it very clear that Trident renewal costs must be taken as part of the defence budget."

Leaks from inside the ministry suggest it is the RAF that is most likely to be hit.

John Harris, page 25


Patrick Wintour, political editor

The GuardianTramp

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