Osborne ally insists cuts will happen

Amid uncertainty about whether the coalition would revise its plans in the event of a double-dip recession, the Transport Secretary made clear Whitehall departments would have to work within “firm and clear” four-year budgets.

He said any further stimulus to the economy would have to come from the Bank of England – probably in the form of quantitative easing, or printing money – rather than a loosening of fiscal policy.

His comments yesterday came after Cabinet colleague Chris Huhne, the Liberal Democrat Energy Secretary, suggested that the Government’s massive cuts programme may have to be reined in if the economy entered another downturn.

But Mr Hammond, a close ally of George Osborne, said: “The plans that the Chancellor will set out in his spending review statement on October 20 will set out a pattern of reduction for departments over the four years of the spending review, so departments will have clear and firm budgets.

“And our view has always been that fiscal policy should be set for the medium term, and monetary policy should be used to deal with any short-term shocks.”

Speaking to BBC1’s Andrew Marr Show, he went on: “The Bank of England has got monetary policy to deal with any short-term shocks to the economy, while our fiscal policy – which is about getting the structural deficit eliminated by the end of this parliament – should stay on track, because that’s the key message that markets have received that’s restored confidence, that’s got British interest rates down, that’s got the IMF giving us a clean bill of health and frankly that’s got our economy starting to get back on track for future sustainable growth.”

Labour leader Ed Miliband accused Prime Minister David Cameron and Mr Osborne of being “incredibly cavalier” with the economy, suggesting it was still susceptible to a double-dip.

“There are lots of people saying now there are warning signals in our economy and if they confine our economy to low growth and unemployment, I think people will rightly be very angry, because they have been warned about the scale of cuts they are undertaking,” said Mr Miliband, MP for Doncaster North.

Mr Osborne is set to announce 83bn of cuts in his comprehensive spending review as he sets about eliminating the structural deficit by 2015.

Whitehall departments will be hit by cuts averaging 25 per cent over the next four years.

Mr Hammond insisted that the plans were “manageable” and did not amount to “a cliff edge next year”.

“Departments will reduce their spending in line with the plans agreed by the Chancellor over a period of four years. So if a department is reducing its spending by 25 per cent overall, it won’t be 25% in year one. It will be maybe six per cent in year one, and six per cent in year two,” he said. “So these are manageable cuts over a period of time.”

In a weekend newspaper interview, Mr Huhne indicated he felt the scale of the cuts could be amended, saying he was not “lashed to the mast with a particular set of numbers”.

Mr Huhne stressed yesterday that he regarded a double dip recession as extremely unlikely. The Government’s public expenditure committee, was looking at all elements of spending.