Election '97: Major and Clarke in wealth tax deal

Chancellor's trade-off over family income secures 'One Nation' theme

Kenneth Clarke was responsible for one of the key trade-offs which gave the Conservative manifesto its strong "One Nation" flavour, The Independent has learned.

The Chancellor agreed to the tax breaks for married couples with children, which formed one of the "plums" in the manifesto, in return for downgrading the commitments to abolish inheritance tax and capital gains tax.

Mr Clarke had earlier refused to accept the tax break plan for families when it was pushed in the Cabinet by John Redwood, who was keen on strengthening the commitment to the family.

The Chancellor's late conversion to the scheme, with the support of William Waldegrave, the Chief Secretary to the Treasury, came in the negotiations before the political Cabinet at Chequers, which agreed the broad outline for the manifesto, including the privatisation of London Underground.

Mr Clarke was resisting the pressure from John Major to abolish the two wealth taxes, which the Prime Minister had promised soon after winning the leadership contest against Mr Redwood.

At that time, the pledge to continue the tax-cutting agenda for some of the better-off in society was seen as a pay-off by Mr Major to the Tory right wing for supporting him against Mr Redwood's challenge.

Mr Clarke, however, was not convinced, and succeeded in securing a deal in which the commitment to abolish the wealth taxes was watered down in return for finding the pounds 1.2bn to fund the tax breaks for families.

"It was agreed with the Chancellor we would downgrade the capital gains tax and the inheritance tax commitments, so that would leave room for the tax breaks," said a Whitehall source.

"The co-operation of the Chancellor was also needed to produce the pension plus scheme. He has kept very close to the game."

The fact that Mr Clarke's stamp is on the manifesto may alarm some of his right-wing critics who called for his sacking before the campaigning began in earnest, over his refusal to allow a more Euro-sceptic approach to the European single currency.

In spite of the Prime Minister's commitment to help the "have-nots" with the manifesto, it carried enough initiatives to promote self-help and traditional family values to earn a welcome from leading right-wing figures in the Tory party.

Both the proposals by Gillian Shephard, the Secretary of State for Education, to publish all test results, and the tax breaks for married couples were welcomed by Mr Redwood, who was touring Tory constituencies in the Home Counties. "I am glad to see the Government setting out some of the long- term plans to curb welfare dependency, promote independence and to help those who care for others. This is exactly what the Conservative Party should be doing - promoting forward- thinking ideas," Mr Redwood said.

However, Mr Clarke is emerging as one of the pivotal players in the delivery of the manifesto for a fifth Conservative term. The Prime Minister's confirmation that the tax breaks for families would take precedence over the aim of achieving a basic tax rate of 20p was further confirmation that the Tory party is going into the election with One Nation policies dominating its agenda.

It may raise Mr Clarke's stock now, but he could risk shouldering much of the blame if the Tories lose the election.

The policy compromise on Europe - thrashed out some weeks ago with Malcolm Rifkind, the Foreign Secretary - is being ignored by dozens of Tory candidates who will be fighting on a commitment to reject a single currency.