Lamont refuses to ease up on inflation: Chancellor rules out devaluation as Cabinet prepares to begin search for deep cuts in spending plans

THE CHANCELLOR of the Exchequer last night rejected calls from inside his own party to allow inflation to rise as the price to be paid for economic recovery. Inflation was a 'cancer' which killed economic success, he said.

On the eve of the Cabinet meeting which is expected to signal one of the toughest public spending reviews in years, Norman Lamont said: 'I will have no truck with talk that higher inflation doesn't matter.'

Rejecting calls for devaluation of the pound to allow a cut in interest rates, the Chancellor appealed to Tory supporters 'not to give house-room' to the argument that inflation would help home buyers by increasing the value of their property. 'Far from helping home ownership, inflation undermines the very prosperity on which rising home ownership is built,' he told a group of businessmen at Westminster.

The Chancellor reaffirmed the Government's determination to take firm control of public expenditure now, to avoid wrecking hopes of tax cuts later. He said the Government would fulfil the manifesto commitment to reduce public spending as a share of gross domestic product.

Mr Lamont - facing criticism and unrest from Tory MPs who are growing increasingly worried about the failure of the economy to revive - is expected to give the Cabinet a grim assessment of the economy this morning.

He is expected to tell his colleagues that growth has been slower than hoped in his Budget statement in March, when he scaled down predicted growth from 2.25 per cent to 1 per cent for the year. Spending will have to be cut if the Public Sector Borrowing Requirement is to be limited to the forecast pounds 28bn.

Michael Portillo, the Chief Secretary to the Treasury, will tell the Cabinet spending bids have exceeded the planned total for next year of pounds 285bn, possibly by pounds 14bn.

In a clear signal that it was relaxing spending controls before the election, the Cabinet last year said it would 'stick as closely as possible' to the existing planning totals. Today, the Cabinet will take a tougher line, and issue a statement giving Mr Portillo its collective backing to keep to the baseline agreed and cut out the excess.

The Government hopes its tough spending curbs will enable it to survive the pressure on the pound and avoid an increase in interest rates.

The recession will force the Treasury to allow some programmes, such as unemployment benefit, to rise. But ministers are privately predicting that ways will be found to cut unemployment benefits, and pressure is now on them to reassess some of the long-held priorities for the welfare state.

Thatcherite backbenchers have said that there can be no 'sacred cows', and Virginia Bottomley, the Secretary of State for Health, has warned that she will have to engage in 'mud-wrestling' with the Treasury to avoid cuts in the growth in spending on the NHS.

The outcome, to be announced in November, could provoke an outcry from the lobby groups for the welfare state, but ministers believe that in the first year of the Parliament, they will be able to carry their backbenchers and ride out the storm in time to cash in on a recovery before the next election.