Lamont is warned on more cuts or taxes

Further cuts in public expenditure or increases in taxes will be needed if the economy fails to grow as fast as the Government expects, the Chancellor was warned yesterday by the Commons select committee on Treasury affairs.

Painting a bleak picture of a shaky recovery, the Tory-dominated committee said the prospects for any further cut in interest rates were limited, and told Norman Lamont he was walking a tightrope.

The report coincided with the Treasury's latest monthly assessment of monetary conditions, which has not shaken the Chancellor's belief that the 'substantial' easing in monetary policy since Black Wednesday has yet to feed through to the economy.

According to the Treasury, the rise in narrow money supply growth, higher new car sales and an upward trend in retail sales pointed to a strengthening in consumer demand. But it also noted the continued weakness in the housing market, a fall in bank lending in November and the absence of fuller order books in the manufacturing industry.

Without robust economic growth, the Commons committee said, Mr Lamont would be 'staring down an abyss of ever-increasing fiscal deficits'.

However, its chairman, John Watts, a senior Conservative backbencher, made it clear he was against an increase in taxes in the Budget - leaving the Government facing the possibility of further cuts in expenditure.

'Tax increases in the coming Budget would not help recovery. I would wish to see recovery much more firmly established before increasing taxes,' Mr Watts told BBC Radio's World at One.

'It may well be counter-productive if the consequence was that it would delay recovery.'

Mr Lamont yesterday discussed his Budget strategy with the Prime Minister, who has apparently vetoed any change in the VAT regime in the March Budget to rein in the public sector borrowing requirement, estimated at pounds 44bn- pounds 50bn.

The committee said that if growth failed to match the Treasury's assumption of an average 3 per cent over five years, and recession-related spending continued to rise, other programmes would have to be cut.

Housing benefit, which is rising steeply, could be one of the programmes to suffer.

The committee questioned the Treasury's spending priorities, including a cut of 3 per cent in real terms in training.

'If the Treasury's growth forecasts prove over-optimistic, even slower growth of public spending, or even increases in tax rates, will be necessary to control the growth of the PSBR. Neither alternative appears especially palatable,' the committee said.