Leaked memo revealing 'sobering' Treasury plan likely to lead to friction within coalition as Lib Dems push new wealth tax.
Severin Carrell and Nicholas Watt
George Osborne is drawing up plans to announce up to £10bn of extra cuts in welfare spending next year, according to a leaked account of a briefing to senior civil servants.
The tentative decision of the chancellor to hold his pre-election spending review next year will pave the way for intense wrangling in the coalition.
Nick Clegg, the deputy prime minister, has indicated that the Liberal Democrats might be prepared to block some of the welfare cuts unless wealthier people are asked to make an extra contribution to reducing the fiscal deficit.
The timetable for the next round of spending cuts was highlighted in an internal memo by Sir Peter Housden, permanent secretary for the devolved Scottish government in Edinburgh, who warned staff of a "sobering" assessment from the Treasury at a meeting in London in May.
Housden said of the meeting at the Foreign Office, which was addressed by William Hague and Danny Alexander and senior officials from the Treasury and Department of Work and Pensions: "They reminded us that the UK strategy for fiscal consolidation implies that the next spending review (due next year, it is thought) will involve a reduction in spending of the same order as in the current programme, and further substantial reductions in welfare spending, beyond those currently in the pipeline.
"This provided a sobering backdrop to a discussion on the civil service reform plan being prepared for publication in June this year."
The Treasury played down the significance of the Housden memo because Osborne announced in his budget in March that an extra £10bn of welfare cuts may have to be introduced by 2016 as the economic downturn lasts longer than expected.
Osborne said that unless welfare was cut by £10bn by 2016 then other areas, such as education, would have to be cut by more than the current 0.8-0.9% real term cuts in the next spending period - 2015-16 to 2016-17. In his autumn statement last year the chancellor announced that he was extending his deficit reduction plan by two years.
But the Housden memo did indicate that the chancellor was planning to outline his pre-election spending review in 2013. This was originally intended to cover the two years of the next spending period 2015-16 to 2016-17. But it may only cover one year because the Lib Dems are said to be uneasy about outlining specific cuts for such a long period into the next parliament.
The Treasury said of the memo: "There is nothing new in this. The chancellor set out plans for a further two years of fiscal consolidation last November. No decisions have been made on the formulation of those savings."
A Scottish government spokesman said: "The permanent secretary was referring to information already in the public domain."
The Lib Dems will fight hard in the run up to the spending review to ensure that the rich are asked to pay more, possibly through a wealth tax, if welfare is to be cut by £10bn.
Clegg told the Guardian on Tuesday: "Welfare reform does have a continuing role. But that has to be done in a way which starts at the top rather than starts at the bottom."
Housden's disclosures about the meeting in May, which was organised by Sir Bob Kerslake, head of the UK civil service, and Sir Jeremy Heywood, the Cabinet secretary, came in his weekly internal memos to Scottish government civil servants. A presentation was made by Sue Owen, director general for strategy at the Department of Work and Pensions, and Sharon White, director general for public spending at the Treasury.
Housden's informal memos have become well-known within his department; he frequently discusses his social life, visits to relatives and homilies on current events. The memo dated 21 May 2012 describes a visit to London, where he happened to see Armando Iannucci and his production team recording the next series of the government satire The Thick of It.
Housden remarked: "I was walking down Whitehall at 8 on Friday morning and came across a little knot of TV people. They were better dressed than news hounds, so I guessed it was a production of some kind. They turned to greet an actor I half-recognised and Armando Iannucci then emerged from Westminster tube with a boho chic assistant producer-type and that clinched it - a new series of The Thick of It."
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