Fox: Dismantle benefits and use money to cut taxes

Dr Fox, a standard bearer for right-wing back-benchers after he resigned from the Cabinet last year, questioned coalition policy that ring-fences funding for health, schools and overseas aid. He said all public spending should be frozen for up to five years to tackle the national deficit and fund tax cuts.

It follows the call last week from another leading Scots Tory, Lord Forsyth, for a round of tax cuts to stimulate growth.

Mr Osborne is also under pressure to change course from the left of the coalition, with Lib Dem Business Secretary Vince Cable pushing the government to accept Labour’s “plan B” for more borrowing.

Dr Fox said yesterday a three-year public spending freeze would save the government £70.4 billion a year. Extending the freeze over five years would save £345bn, he said, adding: “As a Conservative, such a commitment doesn’t scare me.”

But Prime Minister David Cameron made clear he would reject calls to abandon protecting health, schools and overseas aid spending, a promise central to his party’s manifesto in 2010.

He told an audience in Milton Keynes: “There is one piece of advice that I won’t take, and that is the piece of advice that says you ought to cut the National Health Service budget.

“We made a very clear promise before the last election that, yes, we were going to have to take difficult decisions, yes, we were going to have to make some very difficult and painful cuts, but we wouldn’t cut the NHS budget.”

Downing Street said there was no change in the Prime Minister’s policy of protecting schools and aid from cuts until at least 2015-16, as well as ensuring a 1 per cent annual real-terms rise in defence equipment spending from 2015.

In his speech in London, Dr Fox called for a “systematic dismantling of universal benefits and turning them into tax cuts”.

Withdrawing benefits such as the winter fuel allowance from wealthy pensioners could pay for a £2.7bn abolition of income tax on savings, he suggested.

He called for a stamp duty discount for under-30s to help young people get on the housing ladder, and said withdrawing housing benefit from the majority of those aged under 25 would save up to £1.8bn a year.

“I believe that the country will be at its best when the government is small and people are left to enjoy the fruits of their own labour,” said Dr Fox, who also wants a temporary capital gains tax holiday to encourage business investment. “I believe that in leaving money in people’s pockets, economic activity will follow. People will buy houses, invest for their future or just go shopping.”

Meanwhile, Tory back-bench loyalist Eleanor Laing has admitted Mr Cameron could face a leadership challenge.

After speculation over Home Secretary Theresa May and Education Secretary Michael Gove putting themselves in the frame, she said: “They should all be quiet. They should all get their heads down and work together as one Conservative Party for the good of the country.”