Cabinet faces split on tax changes

The Cabinet is facing a series of divisions over how far and how fast to raise taxes to pay for steeply rising social security benefits and bring public borrowing under control.

Options for the traditional pre- Budget Treasury summit that Norman Lamont, the Chancellor, will hold next month include increases in value-added tax.

But some senior ministers, anxious about raising taxes during the recession, are expected to argue for further incentives to economic growth and capital investment.

At the same time there is growing pressure for a 'green' package of tax measures as part of a general environmental offensive by the Government - with Budget rises in petrol duty already a near certainty.

Options put forward for discussion at the Chancellor's traditional pre-Budget meeting at Chevening in a fortnight's time include measures to increase VAT rates and broaden the VAT base by ending exemptions. Exempt items include domestic fuel, public transport, newspapers and books, and children's clothes.

Another option likely to be considered at the pre-Budget summit is a special higher VAT rate on luxury goods - which would meet the normal objection to VAT increases that they hit the poor hardest. Pressure to find ways of raising revenue has been sharply increased by forecasts of borrowing, predicted to increase from pounds 37bn to almost pounds 45bn in 1993-4.

But some ministers believe that, with unemployment due to top 3 million in the first half of next year, tax rises should wait until the second Budget of the year - due in November at the same time as the spending statement under the new system heralded by the Chancellor in his 1992 Budget. One senior minister said: 'A lot will depend on whether the judgement by March is that the Autumn Statement is working.'

Ministers believe that if John Major does decide on further economic stimulus he will override his Chancellor, weakened in his relations with 10 Downing Street since the collapse of the European exchange rate mechanism policy on Black Wednesday and the seizure by the Prime Minister of the economic initiative in the run- up to the Autumn Statement.

Tax incentives to stimulate employment and industrial investment on the one hand, and taxes on consumption on the other, are not mutually exclusive. But some ministers fear that taxes on consumer spending could strangle economic recovery just as it is beginning.

Gordon Brown, Shadow Chancellor, yesterday pressed Mr Lamont to introduce a 'Budget for jobs' and declared that 'Britain enters 1993 with unemployment the central political and economic issue facing the country'. Labour would be pressing for an emergency employment programme in the Budget.

Mr Brown said that with 300,000 jobs at risk in the first half of 1993 Britain was facing the 'real threat' of higher tax bills. He said that in some areas of London more than 500 people were chasing each vacancy. In parts of the South-west and West the ratio was 400-1 and in areas of the West Midlands 350-1.

Michael Howard, Secretary of State for the Environment, is cautiously canvassing the merits of a carbon tax in the Budget, although the Treasury remains sceptical. The department is pressing harder for tax incentives to encourage the use of fuel-efficient equipment.

Should the Government embrace a carbon tax, European Community proposals might allow an opportunity to blame its introduction on Brussels. However the Treasury argues that a carbon tax would unite the opposition of Tory supporters living in rural areas and industry, which is a heavy energy consumer.

The introduction of VAT on domestic fuel is another option.

The ministerial emphasis on green taxation comes as Labour prepares to battle for the environmental high ground, with a new economic strategy tax strategy embracing green measures. Whitehall officials expect the mood will be stimulated by greater action from the Clinton administration in America.

The debate on 'green' taxes is complemented by growing government interest in road pricing. John MacGregor, Secretary of State for Transport, has given his backing to experiments in road pricing - a concept under which, with the use of electronic metering, motorists are charged for the mileage they drive.

Mr MacGregor is to visit Scandinavia to look at road pricing systems, and will publish a paper on inter-urban pricing, which involves toll roads, in the new year. Ministers at the Department of Transport believe that technology has advanced sufficiently to make implementation in inner cities a realistic possibility.