Chancellor hints at tax rise in Budget

THE CHANCELLOR warned last night that he was prepared to raise taxes in his first Budget in order to lower the public spending deficit.

Kenneth Clarke made it clear that he is prepared to risk a rebellion by right-wing Tory MPs, who oppose tax increases, to accelerate progress in reducing the pounds 50b public sector borrowing requirement.

He said the deficit would still be too high under medium-term projections of Norman Lamont, his predecessor. But Mr Clarke also said in an interview for the Financial Times that it was 'unrealistic' to cut public expenditure more than the ceiling agreed by the Cabinet.

'The reason for going for public expenditure is because you are committed to certain public programmes, which you are bound to deliver. And the objective of the Government is to deliver what it said it was going to deliver in a cost-effective way within whatever you judge the country can afford,' Mr Clarke said.

He said that he would be prepared to raise taxes if recovery failed to bring a faster reduction in the PSBR. 'The strong or more sustained growth becomes, the less likely I am to look at the tax side of the account. If growth shows signs of faltering or weakening, the more likely I am to look for revenue.'

A decision on whether to raise additional tax revenue would not be made until three or four weeks before the Budget in the autumn. Mr Clarke hinted that the Treasury's predictions for growth could be raised.

He was also said to have signalled that there was no immediate prospect of a further reduction in interest rates.

The Chancellor confirmed that there was no prospect of an early return to the European exchange rate mechanism, in spite of his support for managed exchange rates.