Lamont delivers rallying call: Chancellor wins table-thumping applause as he demands loyalty to Major and support for tough public expenditure cuts

NORMAN LAMONT began to assert a new authority in the Government yesterday by calling for loyalty to John Major in the wake of the damaging U-turn on the exchange rate mechanism (ERM) and economic policy. The Chancellor made the appeal at a meeting of senior Conservative MPs in the Commons, when he sought their support for a tough round of public expenditure cuts, including a possible freeze on public sector pay increases.

'We should remember John Major's great achievement in the general election. Many people would not be here without that and ministers would not be in office without that. He deserves the complete loyalty of the party,' Mr Lamont told the party's backbench finance committee.

Some Tory MPs said last night that having been eclipsed by the Chancellor in the emergency Commons debate on the economy, Mr Major now needs to reassert his own authority before the Conservative conference by giving a clearer lead on the economy and on Europe.

Party leaders are discussing the possibility of Mr Major using the visit of Poul Schluter, the Danish Prime Minister, next week, to emphasise the British strategy for Europe as president of the European Council of Ministers.

The extraordinary call by the Chancellor for the party to remain loyal to Mr Major revealed the extent of the damage to the Prime Minister's standing and the turmoil caused by the debacle over Britain's withdrawal from the ERM. Lord Parkinson, the former party chairman, said on Channel 4 television: 'He has taken some very heavy blows.'

A battle has broken out among Conservative MPs at Westminster, where senior right-wing Tories are seeking to use the U-turn on the economy to force Mr Major permanently to adopt more Thatcherite policies. Tristan Garel-Jones, a Minister of State at the Foreign Office, will support Mr Major's continuing commitment to the Maastricht treaty in a speech today.

The Cabinet is split over the exchange rate strategy of allowing the pound to float freely. Some senior ministers, including Douglas Hurd, the Foreign Secretary, want a return to a fixed exchange rate as quickly as possible.

But Mr Lamont won a table-thumping show of support from backbenchers when he indicated that he preferred to allow sterling to float with intervention when necessary, but with no target level - described by MPs as 'dirty floating' - which was supported in a Commons motion tabled by Thatcherites and signed by more than 60 Tory MPs.

The Chancellor, who later chaired a meeting of the Cabinet committee reviewing public expenditure cuts, was given the backing of the Tory MPs for 'tough' action to reduce the expected pounds 30bn public sector borrowing requirement. Ministers said Mr Lamont hopes that show of support will impress the City, strengthen the pound and allow room for a further modest cut in interest rates before the party conference.

The Government is sticking to its published total of pounds 244.5bn for public expenditure next year, but capital programmes for road building, defence, hospital building and other schemes are threatened with being cut, opening the Government to the charge it is reneging on its election manifesto pledges.

After the private meeting, Mr Lamont said: 'We have to keep control of public spending. That means public sector pay as well. I said I will have to bear the exchange rate in mind.'

John Townend, chairman of the finance committee said: 'His position has been infinitely strengthened. He is the best Chancellor likely to be around. There will be a lot of opposition if there was any change.'

Mr Lamont, whose future was in doubt a week ago, gave an assurance that there would be 'no going back' on the reduction in inflation which had been achieved over the past two years. That was why public expenditure was very important, he said.

He said no finance minister in the world could be indifferent to the exchange rate. He said he believed in a strong exchange rate. Exchange rate depreciation was a loosening of policy.

Ministers said that although the Government would try to limit public sector pay increases to 2 per cent, they should seek a pay freeze, where possible. Sir Marcus Fox, the chairman of the 1922 Committee of Tory backbenchers, said: 'If it means we have to be tough on public spending and, dare I say, public sector pay, then so be it.'

Parliament, page 8

Leading article, page 14