The Conservatives are set to fight the next election promising to cut public expenditure after a major shift in economic policy.

George Osborne, the Shadow Chancellor, is preparing to abandon a commitment to match Labour spending made just over a year ago. Instead he will free cash to cut taxes and reduce debt.

The policy - to equal Gordon Brown’s public expenditure budgets until 2011 - was intended to thwart claims of Tory cuts, a key theme of successive Labour election campaigns.

But Mr Brown’s failure to go to the country last autumn and the subsequent economic downturn led to growing pressure for it to be scrapped.

Mr Osborne is now positioning himself to ditch the policy of matching Labour spending next year, senior figures close to him have told The Times.

The Shadow Chancellor hinted at the shift in an interview yesterday. “I think the [public finances] are going to cast a long shadow over British policy for the coming years because they are clearly deteriorating very fast,” he said. He added that the Tories would inherit an “economic mess”. “That obviously forces us to think very hard about the difficult decisions we are going to have to take as an incoming government.”

The Government is not due to set public expenditure budgets up to 2014 until next summer. Mr Osborne will wait until after the spending review before setting out the Conservative position publicly, according to aides. They confirmed yesterday that there had been a “tonal change” over the policy. The existing commitment could still tie Mr Osborne to matching Labour spending for the first year of a Conservative administration if the Tories win an election in 2010.

The Shadow Chancellor is due to start a review of the final year’s totals and will ask other members of the Shadow Cabinet to identify savings in their areas.

His positioning on spending comes amid questions about how the Conservative policy of “sharing the proceeds of growth” would operate during a recession.

The policy of increasing public spending more slowly than the growth rate is intended to reduce the size of the State over an economic cycle, but Mr Osborne has not so far spelt out in detail what would happen when the economy shrinks. He acknowledged that the scope for savings would be limited by economic conditions. “The Tory party is not there to impose impossible public expenditure cuts in an economic downturn: that’s not what we believe in,” he said.

He is expected to unveil more details of a new “fiscal framework” at the Conservative Party conference in Birmingham, which starts on September 28, including the creation of an independent panel to restore the credibility of borrowing rules. He is also expected to say that he will oppose any attempt by Alistair Darling, the Chancellor, to suspend the so-called golden rule that limits government debt to 40 per cent of GDP.

In another shift of emphasis, the party is preparing to drop a number of proposals for environmental levies as it reacts to the worsening economy. “I think green taxes are a very powerful tool in tackling climate change,” Mr Osborne said yesterday. “[But the] case is made much more difficult by Gordon Brown and Labour because they have used them as stealth taxes, by which I mean they don’t replace some other tax.”

Although he will not publicly state his intention to ditch the policy of matching Labour’s spending totals, the Shadow Chancellor is likely to hint at the move in his speech.

In a preview of Labour’s likely line of attack, Denis MacShane, the MP for Rotherham, said: “In the same week that the Tories confirm they’ll give £1 billion to just 3,000 millionaires, they now say they’ll cut back the investment in public spending. For all the salesmanship and rhetoric, when it comes to their real commitments, George Osborne shows the Tories are still for the few, not the many.”

Spending plans

Summer 2009 Government likely to set out three-year spending totals for Whitehall departments from 2011 to 2014. Mr Osborne will reveal whether Tories would match public expenditure budget

Autumn 2009 Review of the final year (2010) of current round. Tories may also change spending totals for coming year at this point

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