Chancellor sets out plan for 'get up and go' economy: Clarke proposes to reduce spending to less than 40% of national income

KENNETH CLARKE yesterday held out the prospect of reducing state spending as a share of national income from 45 per cent to below 40 per cent, the first time he has done so since becoming Chancellor.

His long-term objective of seeing the proportion falling to below 40 per cent in 'good, even, times' may go some way to reassuring critics on the Tory right who have complained that he should be doing even more to cut spending.

The complaints were made despite the current series of bitter battles - which will resurface at a special Cabinet meeting tomorrow - as spending ministers have sought to protect their programmes from cuts needed to meet the agreed spending ceiling of pounds 253.6m for next year.

Malcolm Rifkind, Secretary of State for Defence, is still arguing against cuts, even though the orig inal Treasury demand for further reductions of up to pounds 1bn in 1996-97 in his pounds 23bn budget has been scaled down to nearer half that.

Mr Clarke's tough projection of public spending came during an interview in which he admitted that the recovery, while coming along 'quite well', was 'patchy'. He cautioned against mood swings of optimism and pessimism on the economy, and said he agreed with the Bank of England Governor, Eddie George, that interest rates were not too high 'at the moment'.

Mr Clarke said on BBC Television's Breakfast with Frost that he did not expect state spending as a proportion of Gross Domestic Product to fall to Japanese or US levels, and added: 'I'd like to combine North American 'get up and go' economics, the climate for . . . starting up new businesses, with an up to date, efficient, cost-effective European-type welfare state, and I think you could run that at something below 40 per cent of GDP being taken by the state, via taxes, out of the economy.'

Mr Clarke did not specify a timetable for reducing state spending to below 40 per cent of GDP. Treasury forecasts in the March budget envisage the total coming down to 43.5 per cent in 1997-98. It fell to 39.25 per cent in the period of above average growth in 1988-89.

Beside the wrangle with Mr Rifkind, Mr Clarke is also engaged in talks on the increasingly thorny issue of the compensation package for value-added tax on fuel.

But the roads and Housing Corporation budgets now look certain to be casualties of the spending round, and the CrossRail and Channel Tunnel link projects are expected to face further delays as a result of the spending squeeze.

The Chancellor has also given short shrift to an attempt by Virginia Bottomley, Secretary of State for Health, to make a special case of the pay of NHS workers. Mrs Bottomley is among several ministers who expressed doubts at last Thursday's Cabinet meeting over the decision to raise MPs' pay by 2.7 per cent because of the impact on public servants.

Talking about VAT on fuel, the Chancellor repeated yesterday that, with hindsight, it would have been better not to defer either the imposition of the tax, or the detailed announcement of compensation to alleviate its impact on vulnerable groups. He, along with rest of the Cabinet, had agreed to deferral at the time to protect the recovery. But had they gone ahead at the time 'nobody would be talking about it in November 1993 as they are'.

His remarks will do nothing to dispel speculation that he is considering imposition of the full 17.5 per cent tax on fuel in one go. On compensation, he is coming under pressure from Cabinet colleagues to extend help beyond those on income support to 'nearly poor' pensioners with savings.