The Tories are considering cuts to the NHS and overseas aid

Osborne may use next year's Spending Review to remove the ring-fence on health and international development spending.

Ahead of next year's expected spending review (which would cover spending from 2015-2017), the Guardian's Patrick Wintour reports that the Tories are unsure whether they will be able to repeat their 2010 pledge to ring-fence spending on health and international development.

Given the deteriorating fiscal situation, this is no surprise. When George Osborne delivered his first Budget in June 2010, the newly-established Office for the Budget Responsibility forecast that the deficit would fall from £154.7bn (11%) in 2010 to £37bn (2.1%) in 2015. But the failure of Osborne's strategy to deliver growth (indeed, its success in delivering recession) means that, according to the latest independent forecasts, it will now stand at £96.1bn (5.8%).

In response, the Chancellor has already been forced to extend his austerity programme by two years to 2017 (going further, David Cameron has suggested he may need an extra five) and has declared his intention to seek another £10bn of welfare cuts (the reason he tried - and failed - to remove Iain Duncan Smith, who is opposed to further cuts, from his post in this week's reshuffle). With the fiscal situation likely to worsen further as growth remains anaemic or non-existent (the OECD today predicted that the UK economy would shrink by 0.7% this year, a worse peformance than any G7 country except Italy), Osborne is on the hunt for further savings.

Few Tory MPs would weep at the demise of the NHS/overseas aid ring-fence (many were outraged that defence spending was cut by 7.5%, while overseas aid received a 35% real-terms increase) but such a decision would inflict further damage on Cameron's brand. Against this, the Tories believe that a 2013 spending review would cause trouble for Labour by forcing it to come clean about where it would cut. As Treasury select committee chairman Andrew Tyries has said: "Labour would have to respond. Having the coalition parties committed to the same spending path halfway into the next Parliament makes it very difficult for Labour at the election."

The biggest question facing Balls and Miliband remains whether to accept the Tories' spending plans, as Labour did in 1997, or offer a distinct alternative.

George Osborne arrives at Downing Street yesterday for the first cabinet meeting since the reshuffle. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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Why relations between Theresa May and Philip Hammond became tense so quickly

The political imperative of controlling immigration is clashing with the economic imperative of maintaining growth. 

There is no relationship in government more important than that between the prime minister and the chancellor. When Theresa May entered No.10, she chose Philip Hammond, a dependable technocrat and long-standing ally who she had known since Oxford University. 

But relations between the pair have proved far tenser than anticipated. On Wednesday, Hammond suggested that students could be excluded from the net migration target. "We are having conversations within government about the most appropriate way to record and address net migration," he told the Treasury select committee. The Chancellor, in common with many others, has long regarded the inclusion of students as an obstacle to growth. 

The following day Hammond was publicly rebuked by No.10. "Our position on who is included in the figures has not changed, and we are categorically not reviewing whether or not students are included," a spokesman said (as I reported in advance, May believes that the public would see this move as "a fix"). 

This is not the only clash in May's first 100 days. Hammond was aggrieved by the Prime Minister's criticisms of loose monetary policy (which forced No.10 to state that it "respects the independence of the Bank of England") and is resisting tougher controls on foreign takeovers. The Chancellor has also struck a more sceptical tone on the UK's economic prospects. "It is clear to me that the British people did not vote on June 23 to become poorer," he declared in his conference speech, a signal that national prosperity must come before control of immigration. 

May and Hammond's relationship was never going to match the remarkable bond between David Cameron and George Osborne. But should relations worsen it risks becoming closer to that beween Gordon Brown and Alistair Darling. Like Hammond, Darling entered the Treasury as a calm technocrat and an ally of the PM. But the extraordinary circumstances of the financial crisis transformed him into a far more assertive figure.

In times of turmoil, there is an inevitable clash between political and economic priorities. As prime minister, Brown resisted talk of cuts for fear of the electoral consequences. But as chancellor, Darling was more concerned with the bottom line (backing a rise in VAT). By analogy, May is focused on the political imperative of controlling immigration, while Hammond is focused on the economic imperative of maintaining growth. If their relationship is to endure far tougher times they will soon need to find a middle way. 

George Eaton is political editor of the New Statesman.