Cabinet to rule on education budget spending

COLIN BROWN

and JOHN RENTOUL

The Prime Minister is expected to be asked to intervene by Gillian Shephard at the meeting of the Cabinet tomorrow to resolve the dispute with the Treasury over her bid for more spending for education.

The Secretary of State for Education is expected to seek John Major's backing at the Cabinet to break the deadlock with the Treasury over her demands for higher spending.

The Prime Minister gave education the highest priority in his Conservative Party conference speech. The Treasury has been resisting her demands for a higher budget to compensate authorities for cuts last year, which led to teachers being threatened with redundancy.

The Cabinet EDX committee on public expenditure, chaired by the Chancellor, Kenneth Clarke, has been holding daily meetings to resolve the dispute over the education budget and the bid for higher spending on the health budget by Stephen Dorrell, the Secretary of State for Health.

Senior Tory MPs believe the Chancellor will be able to offer pounds 6bn in tax cuts in the Budget, financed by pounds 3bn cuts in spending and pounds 3bn from the contingency reserve. The cuts will include slashing capital spending, including the road programme and hospitals. Private finance will be expanded to fill the gap. Peter Lilley, the Secretary of State for Social Security, is fighting William Waldegrave, the Chief Secretary to the Treasury, over demands for deeper cuts, but social security savings are likely to include ending the lone parent's allowance for new claimants, which could require legislation.

There are expectations, however, that Mr Clarke will drop plans for taxing future share options as income for employees and middle-ranking executives. Those holding options up to the value of about pounds 40,000 could continue to enjoy the more favourable capital gains tax regime rather than have their options taxed as income if the Chancellor accepts a submission from the Institute of Directors urging such a change of tack.

Mr Clarke had already agreed not to make the switch of tax regime retrospective and to apply it only to options acquired after the change, following protests that ordinary workers such as shop assistants on low incomes would be unfairly penalised. Drawing the line at about pounds 40,000 would still enable him to ensure that so-called "fat cat" directors on massive pay and option packages did not boost their rewards at the expense of the Exchequer.

Meanwhile Gordon Brown, the shadow Chancellor, launches the first stage of Labour's three-part pre-Budget strike this morning. In a full-page press advertisement the party claims the UK has "slumped" from 13th to 18th in the league table of national income per head since 1979. Mr Brown will set out the party's plans for tax incentives for investment at a breakfast for 50 business leaders at the Park Lane Hilton hotel, central London, today.

Mr Brown will firm up a proposal for a new, lower rate of Capital Gains Tax for long-term investment and float the idea of enhanced capital allowances for investment in excess of the previous year's.

He is expected to follow up with plans to tackle youth and long-term unemployment paid for by a levy on the privatised utilities.