Cameron: Tories may need to raise taxes

David Cameron has warned that an incoming Tory government might be forced to raise taxes because the economy will be in a dire state after the next election.

The Conservative leader also hinted that he might scale back Gordon Brown's flagship tax credits scheme. He warned that Labour's efforts to combat poverty by redistributing money from rich to poor had reached "the end of the road".

He hoped the Tories would not have to raise taxes but added: "The Government always has to do what is right to safeguard the public finances." He said Mr Brown should now be cutting taxes to give the economy a stimulus but could not do so because "the cupboard is bare".

Robert Chote, director of the Institute for Fiscal Studies, said: "The difficulty... is that the Conservatives may inherit a position in which the public finances demand that taxes go up."

Mr Cameron's aides insisted his long-term goal was to reduce the tax burden and that the Tories would not scrap tax credits. His remarks will be seen as an attempt to head off renewed pressure from Tory traditionalists for a firm pledge of tax cuts in the party's election manifesto. They say the need to revive the economy makes the case for lower taxes even stronger, but Mr Cameron is refusing to promise cuts, a formula that failed to bring victory at the last two elections.

The Tories are reappraising their strategy in the light of the gathering economic gloom. In a keynote speech to the CBI yesterday, Mr Cameron repeatedly highlighted the economic problems that the party would have to tackle on taking office. He said: "Living within our means is the only sustainable way to get taxation down... to make sure our public services get the investment they need and to sort out our public finances."

After immediate action to help employees, homeowners, savers and families, he said the Tories would need to take long-term action "to repair the damage" Labour had inflicted on the public finances.

Mr Cameron set out an "economic recovery plan" which included US-style measures to give struggling firms breathing space to restructure rather than go bust. Companies could get funding from lenders in return for "super priority" over other unsecured creditors.

"The credit crunch has meant companies are finding it hard to get the money they need to keep their businesses alive," he said.

John Hutton, the Business Secretary, said US-style Chapter 11 insolvency rules would be counter-productive. He said: "David Cameron's proposals would actually create a greater risk of companies going under because banks could tighten up their business lending ahead of the changes coming into effect.

"Importing Chapter 11 into the UK is a poorly thought through idea."

John Cridland, the CBI's deputy director general, said: "Business would be interested in any proposals that give companies breathing space when faced with unexpected liquidity problems. However, the ramifications need to be carefully considered."