Political divisions over continuing austerity widened as the business secretary, Vince Cable, warned David Cameron that very serious damage will be done to British industry if the prime minister continues to insist only some departments will be subject to spending cuts .
In a fresh intervention, the Liberal Democrat also called for affluent pensioner perks such as winter fuel payments and free TV licences to be taxed, and proposes up to £15bn of capital spending on house building less than two weeks before the budget is due to be unveiled.
Cable's comments came after Cameron suffered an unprecedented – and embarrassing – rebuke from the Office for Budget Responsibility for claiming in a speech on Thursday that his deficit reduction programme had no impact on growth.
The head of the OBR, Robert Chote, wrote to the prime minister saying the government's austerity programme had knocked 1.4% off GDP in the past two years. He said: "For the avoidance of doubt, I think it is important to point out that every forecast published by the OBR since the June 2010 budget has incorporated the widely held assumption that tax increases and spending cuts reduce economic growth in the short term."
Speaking to the Guardian, Cable said political disagreements over future spending plans were so intense that it was an option not to complete the planned coalition spending review this year, due to cover 2015-16.
In comments likely to further inflame tensions between ministers he said: "If you keep going back to the same departments taking more than proportional cuts, you do disproportionate damage."
Cable challenged the whole premise of the spending review, including Cameron's insistence that the schools, health, aid and defence equipment budgets must be excluded from the cuts, as they have been since 2010.
The decision is leading to a revolt by the Ministry of Defence, the Home Office and the business department for which Cable claims to be the shop steward.
He said: "All our departments should be doing their bit by efficiency and reform." Negotiating publicly with the Treasury and No 10, he added: "We have done very brave things in the first spending round, but we have now got to the point where further significant cuts will do enormous damage to the things that really do matter like science, skills, innovation and universities."
His remarks came amid a deepening row over the government's austerity cuts in the wake of the loss of the UK's AAA credit rating. On Thursday, Cameron said that there was "no alternative" to the government's economic and fiscal policy.
Cable said he was disturbed that the spending review for 2015-16 was working on an assumption that 85% of the further deficit reduction would come from spending cuts and only 15 % from tax rises. He said he did not agree with this balance, and urged higher taxes on pensioners' perks such as the universal winter fuel payments, free TV licences, travel passes, eye tests and prescriptions.
Cameron has said they must be protected until after 2016, but Cable said: "I have been getting the winter fuel payment for five years, it has been keeping me warm in Twickenham. I actually give it away. If we are in the realm of tough choices, why did we feel this area is a sacred cow?"
Cable and Nick Clegg agreed at a meeting on Thursday to make the pensioner perks a key target in the spending negotiations.
Cable rejected the argument that a defence of the budget of his business department amounts to fiscal nimbyism, describing such language as "completely absurd". The criticism has been attributed to his Lib Dem colleague and Treasury chief secretary Danny Alexander.
The business secretary also calls for a capital injection into housebuilding in the region of 1 % of GDP. It is the first time that Cable had put a figure on the kind of capital spending he would like to see since he raised the issue of extra borrowing in a New Statesman essay earlier this week.
He said: "If you are talking about under 1 % of GDP that is hardly going to shake the markets to the foundations", adding this amounts to reinstating the capital spending cut since the peak of 2008-9.
Cable said there were "crucial sectors of the economy, like construction, which need a demand boost after being laid low by the bursting of the bubble" and highlighted commercial and residential property prices outside London as needing support.
He added: "To most people it seems merely common sense that in a crisis where the private sector lacks the confidence to invest, the government should do so: building modern infrastructure or giving councils the freedom to build affordable homes." Historically, low interest rates mean that government (and local government) can borrow to invest cheaply."
A motion on the economy calling for a change of course is now likely to be debated at the Liberal Democrats' spring conference, which began on Friday.
"Some people say we mustn't frighten the horses. They say that any change in direction, however sensible, is too risky and will cause panic. There is of course a balance of risks and that mattered most when we came into office. But we should ask whether that balance of risks has changed," the business secretary said.
Meanwhile, the rebuke from the OBR, the government's independent public finance watchdog, is politically embarrassing for Downing Street even if it does not amount to a call for a change in government economic thinking.
In his uncompromising speech on Thursday, Cameron had said the OBR supported No 10's view that the lack of growth since the coalition took office was due to the eurozone crisis, a rise in oil prices and debts from the financial crisis. He claimed the OBR had said the deficit reduction programme was not responsible in any way.
However, a spokesman for the watchdog said Chote had felt it necessary to spell out the position "in case that were in question" after the speech.
Responding, a Downing Street spokesman said: "The OBR has today again highlighted external inflation shocks, the eurozone and financial sector difficulties as the reasons why their forecasts have come in lower than expected. That is precisely the point the prime minister was underlining."
Ed Balls, Labour's shadow chancellor, said: "Deep spending cuts and tax rises have reduced economic growth, as the OBR says, and so it was deeply misleading for David Cameron to claim otherwise."
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