Prepare for rapid post-election budget and deep spending cuts – Hammond

David Cameron may be forced to stage a rapid post-election budget to calm the markets and prevent a drop in Britain’s credit rating in the first days of a Tory government, Philip Hammond, the shadow Treasury chief secretary, warns in a Guardian interview today.

Anticipating an era of deep short-term cuts in public spending, Hammond urges voters to give the Conservatives a big majority so a new government can act boldly to cut the public debt, warning that the public finances are in such a state “the worst outcome for Britain would be an unclear political result at the election”.

Hammond, destined to be the man to rein in public spending if the Tories gain power, also concedes he is “likely to become a great figure to pin up on the dartboard, and throw darts at. I am sure there will be short-term pain and brickbats.”

But he argues: “It is absolutely not the case that people in the public services are dreading this, or saying ‘oh my God, what is going to happen?’ ” He claims civil servants are preparing to make cuts without waiting for instructions from on high. “There is a sense of liberation that we are going to empower public sector professionals to undertake the reform.”

Setting out Tory ideas, Hammond discloses there will have to be a budget either soon after a spring election, or in the autumn, so the Conservatives can start to rein in public spending next year.

He warns that Britain’s credit-worthiness could be downgraded, pushing the economy into crisis. Such a move, which has been threatened by the international credit rating agency Standard and Poor’s, would make it much more expensive to pay back the national debt, which this week reached a record £799bn.

He said: “We have got this Damocles’ sword of Standard and Poor’s hanging over us, with the commitment they have made to review Britain’s credit rating in the summer of 2010 after the general election. Everybody in Britain has a vital interest in ensuring that the triple A credit rating agency is maintained.”

“It is absolutely essential that we send a signal to the markets that we have a credible plan to resolve the fiscal crisis and the debt crisis over a sensible period time,” he says.

He warns that it would be dangerous to assume the government could do whatever it likes without getting a market reaction. Implying that the Tories will regard it as necessary to hold an emergency budget, he says: “I think the markets will expect to see early action because we have made it clear that we will start the process in 2010 whereas Labour has said it won’t start the process until 2011-12. Early action adds credibility.”

Hammond was speaking as the latest economic figures publishedtoday showed worse than expected second quarter growth figures, with a fall of 0.8%, worse than the consensus forecast of a 0.3% fall.

His remarks come after analysis for the Guardian, carried out by the Institute for Fiscal Studies, showed that Britain would face spending cuts of more than 16% to key public services if Labour and the Tories live up to their pledge of protecting schools, hospitals and defence.

He said one of the first tasks of an incoming Treasury team, in examining when to hold the special budget will be the reaction of the markets, and whether the economy is “going to get anywhere near” the government’s forecast of 3.5 % growth in 2011.

Hammond also discloses that the Conservatives may try to speed up the Labour timetable to reduce the deficit, and intends to place most of the burden for that deficit reduction on spending cuts, because the current level of projected debt in relation to GDP – about 56% – is unsustainable. He also says he is worried that there are not enough civil servants in Whitehall with experience of cutting services. “There are a lot of civil servants in key posts who have never had to deal with the spending restraint … likely to be required now,” he says.

He also rejects growing right wing calls to drop David Cameron’s pledge that the NHS budget will be protected from cuts and rise at least in line with inflation.

He admits that he had come to the issue of ring-fencing the NHS budget as a sceptic on the basis that a lot of money had gone in and productivity had fallen. But he said:”The pressure of demography is so inexorable that the NHS is going to struggle to deliver the kind of service people expect even with modest real terms increases in budgets.”