Liam Fox leads calls for Budget tax cuts to dismantle 'bloated' state

Former Defence Secretary, Liam Fox (Justin Sutcliffe)

Liam Fox, the former Defence Secretary, will pile more pressure on David Cameron tomorrow by demanding a radical Budget next week that abolishes capital gains tax (GCT).

Amid growing speculation that right-wing Conservative MPs will trigger a vote of confidence in Mr Cameron's leadership, Dr Fox will call for benefit cuts matched by tax cuts to help create a new "small state". He will call on the Conservatives to build "a society that is sustainable for the future in the way that our current - welfare dependent and debt ridden - economy is not."

In a speech to the Institute for Economic Affairs, the former Cabinet minister will say: "I would like to see CGT reduced, if possible to zero, for a defined period before being reintroduced at a more sensible level. This would create a tax window where businesses that are sitting on assets might be encouraged to sell, investment in capital becomes more attractive and where hundreds of thousands of second homes might come on to the market."

Dr Fox will urge the Conservatives to dismantle the "bloated state" created by Labour. "We must empower people to achieve the dream of home ownership and we must stop taxing the proceeds of their savings and investments so that they can build a prosperous future for themselves," he will say.

The Prime Minister has sought to dampen Tory hopes of tax cuts in the Budget because the Chancellor George Osborne has so little money to play with.

But Mr Cameron's critics are threatening to force a vote of confidence in his leadership of the party -which would require the backing of 46 Tory MPs-if the Budget does not restore the party's fortunes and it does badly in the May county council elections.

Theresa May, the Home Secretary, raised eyebrows at the weekend by making a speech which ranged way beyond her departmental brief. Although she insisted Mr Cameron would lead the party into the 2015 election, her address was seen as another sign that she will be a candidate to succeed him when he stands down.

Mrs May said of the Tories: "We have to become the party that is tireless in confronting vested interests, the party that takes power from the elites and gives it to the people, the party not just of those who have already made it, but the home of those who want to work hard and get on in life."

Some Tory MPs saw that as a signal that the privileged backgrounds of Mr Cameron and Mr Osborne may be harming the party's image. Sarah Woolaston, a Tory backbencher, said the Prime Minister's inner circle looked " far too posh, male and white" and he was running out of time to change it.

Baroness Warsi, the Foreign Office and Communities Minister, backed Mr Cameron but admitted his leadership was under discussion. She told Sky News: "He is doing a very difficult job in very difficult circumstances and he commands the support of large parts of his party. But I think Theresa [May] like me would agree that we have full confidence in the Prime Minister and fully supports him continuing to lead the party."

With weekend opinion polls suggesting the Conservatives are heading for defeat in 2015, Michael Portillo, the former Tory Cabinet minister, told Sky: "I think we have reached the stage of the Government where lots of people are thinking about who might be the next Conservative leader and in what circumstances. One is a challenge to the leadership during the course of this parliament, which I still think is pretty unlikely. The second is a Conservative defeat at the general election and the replacing of the leader thereafter, which I think is a great deal more likely."