By Guy Faulconbridge
LONDON (Reuters) - When the chief enforcer for Britain's finance ministry suggested that the army should cut spending further because it had more horses than tanks, he provoked an indignant response from one of his own colleagues in the cabinet.
As Britain prepares to say who will take the pain for more cuts, the row over ceremonial horses versus tanks shows just how hard it is to trim the size of a state that the government says has been overspending for years.
While the cuts have upset some voters and stoked tensions among senior members of Prime Minister David Cameron's coalition government, the debt mountain is still rising and Britain has lost its prized triple-A credit rating for the first time since it received the rating in 1978.
For finance minister George Osborne, the row over Britain's military horses shows the political dangers and limits of austerity just as he puts the finishing touches to his spending review announcement due on June 26.
"In a department that has more horses than it has tanks, there are room for efficiency savings without affecting our overall military output," said Danny Alexander, Osborne's cabinet-level deputy at the Treasury.
Asked about the criticism of his horses, Defense Secretary Philip Hammond fired back in parliament: "I will probably not share with my Honorable Friend all the thoughts that I would like to offer to the Treasury and some of my colleagues."
"While it is easy to draw attention to such things as the number of horses in the army, the moral component of our armed forces — that which links it to the great tradition of military service in this country — is a very important part of delivering military capability and is money well spent."
One lawmaker retorted that the bosses at the Treasury, Britain's most powerful ministry, should be served with an "idiot's guide" to Her Majesty's armed forces to put them out of their ignorance.
A spokesman for the Ministry of Defense said it had about 500 horses compared to around 350 tanks. The horses are used in ceremonial events such as the opening of parliament and the celebration of Queen Elizabeth's official birthday.
In what will be the fourth year since he took power promising deep spending cuts, Osborne reached deals with ministers including Hammond to secure 11.5 billion pounds ($17.70 billion) of further cuts in 2015-2016. The fate of the horses was not immediately clear.
When Osborne arrived at the offices of the Treasury following the 2010 election, his deputy had been left a note by departing Labor treasury chief secretary Liam Byrne saying: "I'm afraid there's no money left".
Osborne faced a budget deficit of 11 percent of gross domestic product (GDP) and the UK gilt market was, in the words of Pimco's Bill Gross, the manager of the world's biggest bond fund, "resting on a bed of nitroglycerine" because debt was far too high.
The opposition Labor Party accuses him of damaging the economic recovery by cutting too far and too quickly, although it has pledged to keep to the spending plans for 2015-16 if it wins power in the 2015 election.
After Osborne staked the reputation of the Conservative-led coalition government on reducing Britain's debts, lower than expected tax receipts from a stagnant economy forced him to extend the budget cuts way past the 2015 election.
"We are out of intensive care and our job now is to secure the recovery," Osborne said in a BBC interview on Sunday.
"We're going to go on taking the difficult decisions, go on cutting back spending, go on prioritizing spending on the things that help the economy and cutting the spending that doesn't."
The International Monetary Fund, long known for its support of austerity economics, has begun calling on Osborne to increase spending to boost demand. Yet the chancellor has shown no sign of relenting, at least in public.
The British state is still spending about 120 billion pounds more than it receives each year. Public sector net debt is forecast to peak at 85.6 percent of GDP in 2016-17.
"Prior to the financial crisis, we had one of the lowest debt ratios of below 40 percent of GDP, so we have seen our debt ratio rise faster than our peer group," said John Hawksworth, chief economist for the United Kingdom at PwC.
"Sustained growth is harder to achieve now, and an older population will be very averse to higher inflation, so it will be a long tough job to get our debt ratio back down to pre-crisis levels of about 40 percent of GDP."
The biggest debt since World War Two has stoked a discussion about whether the taxpayer can still afford the size of state which Britons have cherished for over half a century.
The post-war creation of the welfare state by Labor is taught at schools and Britain's National Health Service is a point of pride, celebrated at the London 2012 Olympics opening ceremony as a part of what it means to be British.
Despite Osborne's reputation for swingeing cuts, total expenditure has actually increased in nominal terms under his watch and is due to rise to 720 billion pounds in 2013-14 from 670 billion pounds in 2009-10.
Osborne says the public sector was far too big and that Britain needs a tough fiscal policy to get the deficit under control so that the government can spend on health and schools.
State spending is declining as a percentage of GDP: from 47.4 percent in 2009-10 to 45.2 percent of GDP in 2013-14. But most of the cuts are still in the future, with spending projected to fall to 40.5 percent of GDP in 2017/18, near the long-term average for Britain for the past half century.
Still, even achieving the cuts so far has required reducing the public sector workforce by nearly 10 percent, to 5.7 million from 6.3 million, a step Labor says holds back the economic recovery by taking money out of the economy.
Britain is cutting the army by 20,000 soldiers over this decade and its navy and air force have lost 5,000 each. Fees charged to students for university have been tripled.
The police force has been cut by at least 10,000 and the Foreign Office has had to cut back embassy jobs, sell off exotic properties and cap expenses for mid-ranking diplomats.
Osborne's hands are partly tied by pledges not to touch spending on the National Health Service and schools - which together account for a third of spending - as well as on overseas aid - a small item but one that annoys some Conservatives who think it wrong to shield aid abroad while imposing cuts at home.
Some senior members of Cameron's Conservative party say Osborne has so far failed to get a grip on the biggest target of all, 220 billion pounds ($338.5 billion) of annual "social protection" spending, nearly a third of the total and more than five times as big as the defense budget.
So far, the government has announced a cap on benefits for any one family at 26,000 pounds a year to ensure that those on state aid do not receive more than the average working family. Tenants in state-funded social housing will be forced to pay a fee or move home if their homes are deemed too large.
Those on unemployment benefit will see rises to their payments capped at 1 percent a year for three years. The wealthy have also been targeted, with parents earning more than 45,000 losing their weekly child benefit cheques.
Polls show as many as six out of 10 voters think state benefits are too generous. But critics say many of the changes, while attracting fanfare, will actually save very little money while hurting the most vulnerable in society.
"These changes will mean it is children and families who will pay the price for high inflation, rather than the government," said Justin Welby, the Archbishop of Canterbury, spiritual leader of the world's Anglican Christians.
(Additional reporting by William Schomberg, Andrew Osborne and Costas Pitas; Editing by Peter Millership and Peter Graff)