Budget 'leak' dampens tax-cut hopes of big tax cuts dashed

COLIN BROWN

Chief Political Correspondent

A 1p cut in the 25p basic rate of income tax was being forecast by senior Whitehall sources last night in a clear attempt to damp down expectations of bigger cuts in taxes in next week's Budget.

The Treasury was last night accused by Labour of deliberately leaking the report as a smokescreen for Kenneth Clarke's Budget, but the Treasury denied being the source. The pre-Budget speculation underlined the fear among leading Tories that the Chancellor and the Prime Minister have fuelled expectations of cuts of up to 3p in the pound, destroying the impact of the package to be unveiled on Tuesday.

The markets responded badly to the earlier leaks, as the pound slumped against foreign currencies, and ministers are keen to avoid speculation causing a further weakening .

The Chancellor will face renewed pressure from Tory MPs over the weekend to go for tax cuts of at least pounds 5bn, financed by cuts in public expenditure.

Whitehall sources warned that room for manoeuvre was severely limited by spiralling public borrowing.

Officials broke the traditional pre-Budget silence by contacting a national news agency, the Press Association, to damp down rising expectations of a tax give-away. The sources said 1p off the current 25p basic rate could be accompanied by higher personal allowances and modest reductions in inheritance and capital gains tax.

John Townend, chairman of the Tory finance committee, warned that limiting the tax give-away to pounds 3bn could cost the party the next election. "At pounds 10bn I think we would win the next election, at about pounds 6bn we could be in with a chance, but if it is only pounds 2bn or pounds 3bn we can forget it," he said. "I would like to see increased allowances for families and old people, an expansion of the 20p rate of income tax so that it progressively becomes the standard rate, and 25p the start of the higher rate, a package for housing and a phased reduction in inheritance tax and capital gains tax."

But the Whitehall sources went out of their way to dismiss as "hopelessly optimistic" speculation that Mr Clarke had up to pounds 8bn at his disposal. Public borrowing is heading for a substantial overshoot of the Treasury's pounds 23.6bn target this year and was said to be severely limiting room for manoeuvre.

The shadow Chancellor, Gordon Brown, said: "Mr Clarke has admitted that the Tories have raised tax by the equivalent of 7p in the pound and only a reduction of that scale could undo the 21 tax rises the Tories have been responsible for."

Labour has pledged that it would bring in a 10p starter rate for income tax, cut VAT on fuel to 5 per cent and levy a windfall tax on the profits of the privatised utilities to fund a jobs and training programme.

The 10p tax target has upset some Shadow Cabinet members, who regard it as another shift to the right, and Brian Ma-whinney, the Tory chairman, sought to exploit the divisions, by claiming in a speech at Loughborough that Labour was "coming apart at the seams" over its budget plans.