UK Government Faces $13.7 Billion Budget Hole

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George Osborne's attempt to slash £11.5bn off public spending in election year has run into cabinet trouble, after ministers identified only £2.5bn in cuts to their budgets.

Some ministers failed to provide Mr Osborne with the list of 10 per cent in proposed departmental cuts he ordered before last month's deadline. One said the chancellor was "asking too much".

Those regarded as being awkward include two rightwing Tories – Philip Hammond at defence and Owen Paterson at environment – along with Vince Cable, the Liberal Democrat business secretary.

In a sign of tensions before the conclusion of the 2015-16 spending round on June 26, one spending minister said: "The low-hanging fruit has gone, it is very difficult now to find these sorts of cuts."

Mr Osborne and Danny Alexander, his Lib Dem chief secretary, are preparing for weeks of attrition but insist that they will achieve their objective of cutting departmental spending in election year by £11.5bn.

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Treasury officials say the process will be "tough" but insist: "The work we have done with the departments so far confirms we are on course to achieve the numbers we set out."

Mr Osborne is said to be encouraged by the initial work done by most ministers in identifying cuts: they were asked to model for 10 per cent cuts to allow some room for manoeuvre before arriving at a final 8 per cent reduction.

However the cuts proposed by ministers in day-to-day spending have been offset by ambitious bids to spend more money on capital projects, far exceeding the £3bn capital pot released by Mr Osborne in this year's Budget.

Several insiders said the net effect of the submissions received so far is to cut overall spending by just £2.5bn – effectively leaving a gap of £9bn in savings required. The Treasury refused to confirm that figure.

Department officials argue that it is relatively easy to turn down requests for more spending on capital projects and that the gap in proposed cuts in current spending is much smaller than that net figure would suggest.

But behind-the-scenes a political battle is under way. Mr Hammond, seen by some Tories as a future leadership contender, is publicly staking out a position as a staunch defender of military spending, while indicating this week that he was prepared to countenance Britain leaving the EU.

Like Mr Paterson, Mr Hammond argues that the Treasury should look for savings elsewhere: either from "protected" areas such as health or from extra cuts to the welfare budget.

Mr Hammond, formerly a close ally of Mr Osborne, warned in March that more cuts would erode military capability, even though the Ministry of Defence equipment budget is protected and he is only being asked to find 5 per cent of savings.

Mr Cable and his fellow Lib Dems say the welfare budget is off limits from further cuts unless the Tories agree to reduce the universal benefits paid to wealthy pensioners, including the winter fuel payment.

Some in the Treasury believe that the tough choices facing ministers on both Tory and Lib Dem sides of the coalition may force them to look again at the possibility of welfare cuts.

The spending round for the 2015-16 financial year, which spans the planned general election in May 2015, is poised to the biggest test of coalition unity this year.