Child benefits may be taxed: Pressure on public borrowing grows as rise in high-street spending 'fizzles out'

CABINET ministers are considering a proposal to tax child benefits, which could raise up to pounds 1bn from about 7 million families, as part of a concerted effort to reduce public sector borrowing.

Such a decision would provoke strong, all-party protest. But Frank Field, Labour chairman of the Commons Select Committee on Social Security, said he would favour the move - if the money was pumped back into other benefits.

'In effect, it's a cut in its real value for most people,' he said. But he suggested that there could be public sympathy for taxing better-off recipients of the benefits.

Nevertheless, the proposal will surprise many because of the apparent force of the commitment in the Conservatives' election manifesto: 'Child benefit will remain the cornerstone of our policy for all families with children. Its value will increase each year in line with prices. Child benefit will continue to be paid to all families, normally to the mother, and in respect of all children.'

But a Cabinet source told the Independent last week that he had re-read the manifesto passage - the wording of the commitment did not preclude taxation; and that any such move would have to await next year's Budget, because the current spending round did not include tax measures.

The precision of that response indicated that the option was very much alive. Michael Meacher, Labour's social security spokesman, said: 'If that is a serious option, it is cutting the value of child benefits for everyone by a quarter.'

Chris Smith, a Labour Treasury spokesman, added: 'Tax starts to bite on people earning between pounds 5,000 or pounds 6,000 a year, and for people in that sort of position, child benefits are a vital addition to their family income.' Baroness Thatcher, who froze the benefit from 1987, is known to have wanted changes to it. She was thwarted by the wording of her manifesto pledge, and John Major sanctioned increases after he became Prime Minister in 1990.

But Mr Major is about to enter one of the most savage spending rounds for many years against a background of economic recession and backbench Tory disaffection over the Maastricht treaty legislation.

The impact of the recession on the building industry will be brought home to the Prime Minister at a meeting today with the Construction Industry Employers' Council, whose members' volume of work is further threatened by increasing mortgage rates and the Treasury's reimposition of stamp duty next month.

Gordon Brown, who is expected to become Labour's shadow Chancellor in John Smith's frontbench reshuffle on Friday, said yesterday: 'The latest rise in one building society's mortgage rate emphasises that the Conservative election promise that economic confidence would follow their election victory as night follows day was a fiction now increasingly exposed as a fraud.'

But the recession is aggravating the public spending crisis, reducing tax receipts and increasing benefit pay-outs, and cabinet ministers were preparing over the weekend for Wednesday's session at No 10 on the public expenditure survey.

Michael Portillo, Chief Secretary to the Treasury, warned last night that if the Conservatives were to use the 'Coca Cola strategy' - persuading the electorate that they were 'the real thing' in terms of market economics - they would have to prove it with spending cuts and a reduction in borrowing, providing scope for pre-election tax cuts.

John Townend, chairman of the Conservative backbench finance committee, said last night that 'sacred cows' such as health, social services, overseas aid and education should not be exempt from public spending cuts.

Mr Townend, MP for Bridlington, said government departments must not be exempt from the 'pain' being suffered by private industry. 'In any cuts in spending the Government should not take the easy way out by cutting capital spending first as this will undermine recovery further.'

The mood of economic gloom will be deepened by a report from the Confederation of British Industry this morning that the post-election rise in high-street spending has 'fizzled out'. Its distributive trades survey shows June spending was down on a year earlier for only the second month in a year.

The CBI survey will add to the nervousness of the financial markets, where sterling and share prices are expected to be under pressure. Both fell sharply last Friday on worries that interest rates would not come down until the end of the year and that a round of mortgage rate rises could prolong and deepen the recession.

Attack on Labour, page 7

Leading article, page 20

William Rees-Mogg, page 21

Sterling under pressure, page 22

Gavyn Davies, page 23