David Cameron To Try And Calm Tory MPs' Nerves With Speech On Economy

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David Cameron is set to attempt to calm Conservative nerves with a major speech on the economy later this week.

The speech on Thursday, at an undisclosed venue in the north of England, will aim to drive home the prime minister's message on the need to stick to the course on economic policy, aides said.

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David Cameron needs to reassure Conservative MPs over the government's economic programme

It comes amid increased squabbling within the coalition government over spending plans, with defence secretary Philip Hammond going public with a call for welfare to bear a greater share of austerity pain.

His comments were the latest in a series of increasingly open signs that Cabinet ministers are digging their heels in over plans for a fresh round of cuts in the Budget later this month.

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Tory backbenchers unsettled by their party's third place in the Eastleigh by-election have also upped the pressure on chancellor George Osborne by warning that Britain is on track to become a "basket case" unless tougher action is taken on government debt.

Mr Hammond told the Daily Telegraph over the weekend that a number of Conservative Cabinet ministers believed "we have to look at the welfare budget again... if we are going to get control of public spending on a sustainable basis".

He also cautioned that while "modest" reductions were still possible in the defence budget beyond 2015, any "significant" cutbacks would "erode military capability".

However, the prime minister's official spokesman insisted the benefits bill would not be up for grabs in negotiations over the 2015-16 spending review.

The spokesman told a daily Westminster media briefing: "In the context of reports around the budget-setting process for the year 2015/16, I would remind people that the Autumn Statement for 2012 has already announced £3.6 billion worth of additional welfare savings for the year 2015/16.

"The government has already set out additional welfare savings. If new and specific proposals were to emerge, then they would need to be considered."

The spokesman pointed out that the spending review was looking at departmental expenditure limits (DEL), rather than the annually managed expenditure (AME) thread - which includes almost all benefits.

Asked if Mr Hammond's comments were helpful, the spokesman said: "One would always expect secretaries of state and departmental ministers to make a robust case on behalf of their priorities. I think that is entirely to be expected.

"There will be a process of ministerial discussion and negotiation, and following that departmental budgets will be announced.

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"With regard to the MoD's budget, the prime minister's view is that the equipment budget will go up by 1% in real terms from 2015/16 onwards."

Formal budget negotiation meetings between the Treasury and spending departments have not yet started, though Treasury ministers meet their colleagues regularly on a range of issues, he said.

Speaking at an event organised by the Institute of Economic Affairs (IEA) this morning, Tory MP Kwasi Kwarteng floated the idea of tax breaks for new business start-ups.

He said: "If you look at what is happening in America they are actually cutting spending... in a very hands-on, engaged way.

"They do what it takes, to use an American expression. Unfortunately we have not seen massive spending reductions in Britain."

The Spelthorne MP went on: "We are still borrowing £120bn. We are not in a fit state to be spending money in this way.

"We have got to address this. If we do not, we will have another government which will probably not address it and we will end up being a basket case.

"I am quite happy to say that publicly. This is a big, big problem. And unless we actually can man up and deal with it, I think we have got big problems ahead of us.

"We will either try to inflate our way out of it, which will cause absolute devastation, or I cannot really see any way out."

Mr Kwarteng said he wanted to see foreign aid spending slashed by a third and floated measures such as £1 billion of tax breaks for new business start-ups.

Fellow Conservative backbencher Ben Gummer urged fundamental reform so that government expenditure was capped as a proportion of GDP three years in advance.

He insisted the system had allowed Sweden to turn its debts around.

"The biggest thing that the chancellor can do immediately is change the way that government fund themselves," he added.

He also stressed that welfare was the biggest element of spending that needed to be addressed.

However, both MPs accepted that Mr Osborne had little room to manoeuvre and played down the consequences if he did not take any dramatic steps in the Budget.