Coalition sharpens knives for another cutting frenzy

By Alex Stevenson and Ian Dunt

The coalition is gearing up to begin plotting detailed spending cuts extending into the next parliament – despite figures out today showing another setback for its deficit reduction agenda.

Government departments face another battle with the Treasury as they jostle to limit the damage to their own budgets for the 2015/16 financial year.

The coalition is now undertaking a detailed spending review, with only international development, health and schools spending protected from further cuts.

Chancellor George Osborne and chief secretary to the Treasury Danny Alexander called on secretaries of state to "step up their engagement with the Treasury" as the six-month process gets underway. The spending review will be unveiled by the end of June this year.

Downing Street said the emphasis would be on persuading government departments to work together more, limiting the impact of the spending cuts by collaborating and sharing services.

"There's no flinching from the fact that very difficult decisions will have to be made," the prime minister's spokesperson said. "There's universal acknowledgement of that. The point is it's very important as part of that we seek to do more from less in any way we possibly can."

Departments could look to make savings by extending the strategies already employed in the 2010 comprehensive spending review, No 10 suggested, like sharing back office services including HR functions and IT provision.

Such measures are not likely to significantly mitigate the impact of the extended austerity, which opposition figures say is continuing for longer than necessary precisely because of the harsh nature of the coalition's deficit reduction programme.

Conservative and Liberal Democrat ministers were forced to accept they needed joint spending plans extending beyond the next general election after their austerity agenda failed to reduce the deficit in time for May 2015.

But the beginning of the process that will lead to the line-by-line cuts being published this summer came alongside the publication of depressing new figures released today, which showed the UK borrowed £7.2 billion more in 2012 than 2011, underling the Treasury's problem.

December borrowing figures were higher than expected, with borrowing up £0.6 billion on the same month in 2011.

Total public sector net debt is now equivalent to 70.7% of GDP.

"This is borrowing to pay for economic failure as a flatlining economy and rising long-term unemployment have sent the welfare bill soaring and tax revenues have been revised down," shadow chief secretary Rachel Reeves said.

"We urgently need a change of course from this government to create the jobs and growth that are vital to get the deficit down.

"Clinging on to this failing plan will cause long-term damage to our economy and mean more borrowing and more debt to pay for economic failure."

Meanwhile, bookies predicted two consecutive periods of negative growth between the fourth quarter of 2012 and the same period in 2013.

"It will be a close call, but we suspect more likely than not," William Hill spokesman Graham Sharpe said.

The chances of Britain losing its highly valued AAA credit rating are increasing, given it is already on negative outlook.

In practical terms, a reduction in the rating would seriously raise interest costs on the debt. In political terms it would be extremely damaging to Osborne, who relied on the credit rating as proof of his economic policy.

Downing Street said today's figures were broadly in line with market expectations and said the Office for Budget Responsibility forecasted the overall deficit would fall this year.

The prime minister's spokesperson added: "The economy is healing."