The Budget: Portillo warns of tough limits on spending: Election campaign pledge on VAT was 'the plain truth', minister tells commons

A WARNING of the impact of 'very tough ceilings' on public expenditure, with an implicit threat of cuts in some departmental programmes, was issued to the Commons yesterday by Michael Portillo, Chief Secretary to the Treasury, in a noisy resumption of the Budget debate.

Mr Portillo was accused of evasion as he dodged calls to guarantee that the imposition of Value Added Tax on gas and electricity would be reflected 'in full' in benefit upratings.

Gordon Brown, the shadow Chancellor, similarly sidestepped a Tory challenge to promise that a Labour government would remove VAT from domestic fuel, saying only that Labour would vote against the motion which imposes the tax.

Mr Brown said the central flaw of the Budget was its failure to tackle unemployment and economic decline. 'The tragedy is that the only redundancy that really worries the Chancellor is his own, and the only repossession he cares about is repossession of No 11 Downing Street.'

Denying charges of 'betrayal' of election promises, Mr Portillo said that when the Conservatives said before the election that they had no plans to raise VAT, it had been 'the plain truth'.

'Last year we were looking at levels of government borrowing far lower than we are looking at today. We must take action to deal with the changed situation.' The recession had lasted longer than anyone thought. Labour had made the length of it the excuse for abandoning all their tax plans.

'Next year, the public sector would be borrowing around pounds 1,000 a year for every man, woman and child in the country. The interest on that borrowing is going to have to be paid over many years to come,' he said. 'The Chancellor could have chosen to postpone action to another day. Many apparently expected just that. But those who create jobs in Britain need to know that the Government will reduce its borrowings. The manana approach would have done nothing for confidence in the economy.'

Mr Portillo told MPs it was 'absolutely essential' to reduce the proportion of national income spent by the state. For 1994-95 and 1995-96, the Government was committed to real increases in the control total of 1 per cent and less.

'At a time when we are also committed to increasing the money for the health service and increasing the number of students and facing pressures on social security, these are very tough ceilings indeed.'

Some Conservative MPs thought they were not tough enough, he observed. In a poll in the Financial Times last week, 62 per cent favoured cuts in public spending. 'I admire their spirit and I will welcome their support for the hard decisions ahead.'

Intervening, Robert Ainsworth, Labour MP for Coventry North East, asked why, after 14 years of Conservative government, public sector spending was 44.75 per cent of gross domestic product - a higher share than taken over from Labour in 1979. Mr Portillo said it was due to recession. 'I am determined that it should come back down.'

The Chief Secretary was repeatedly challenged by Mr Brown and his colleagues to state whether people on income support and pensions would be 'compensated in full' through the benefit system for the imposition of VAT on domestic gas and electricity.

But Mr Portillo said the Labour spokesman was inventing an entirely new concept in saying that benefits had to be adjusted for particular price rises rather than the retail price index. The increased duty on petrol and diesel would put about 0.25 per cent on the Retail Price Index. People on low incomes were very low users of road fuel but would nevertheless be compensated for the extra expense other people were going to pay. 'So there are swings and roundabouts.'

Accused by Mr Brown of attempting to evade the question, Mr Portillo said the words of Norman Lamont in his Budget statement were perfectly clear. 'He said it would be taken into account when the income related benefits are up-rated next year. The Chancellor chose his words very carefully and they are on the record.'

Alan Beith, the Liberal Democrats' Treasury spokesman, said the Tories had 'debased politics' by seeking election on a platform of low taxes while pursuing a policy of high taxes. The public was entitled to a 're-run' of the general election.

The Government had reduced the economy to the point that even the large Budget tax increases would leave a planned deficit of pounds 30bn. He wondered how much more the Government was prepared to raise taxes in order to deal with the deficit.

'This Budget is the bill taxpayers are having to meet for the catastrophic mismanagement of the economy under the Conservatives.'

Michael Jopling, a former Conservative Cabinet minister, was concerned about the size of the public sector borrowing requirement. On current projections it would cost the Government as much in debt interest payment in 1997-98 - pounds 30bn - as the debt itself would be in that year. Ministers must take 'tough decisions', he said. The options were higher taxes, reduced spending and faster growth - and the Government was likely to have to go for all three.