Which way will Kenneth Clarke jump?

Today's Budget is a balancing act with the Chancellor needing to appear prudent, but knowing time is short before the election. Paul Wallace outlines three possible scenarios Cut and Run

The speech: Thanks to the tough decisions I took in the last two budgets, the economy is in much better shape. Now it's time to reward the British public for all the sacrifices of the past three years. Unlike Labour with its tosh about 10 per cent rates some time in the distant future, I'm announcing a real advance towards a new basic rate of 20 per cent. That means it is coming down from 25p to 22p in the pound. And I'm cutting inheritance tax altogether and reforming capital gains tax. These tax cuts have been made possible by my iron grip on spending. But education and health are going to get big increases.

The subtext: It's the election, stupid. Forget all that guff about the iron grip on spending. I'm giving away pounds 7bn and letting the public sector borrowing requirement take the strain. The City will notice, but it also knows that the economy is weakening fast so it could do with a bit of help from a friendly Chancellor loosening the fiscal reins. And by the way, it isn't going to stop me hammering on the Bank of England's door for an interest rate cut as soon as I can - Eddie George won't know what's hit him when we meet in two weeks' time.

Hear, hear ... This is the Budget we've been waiting for. It puts Labour on the defensive: at last we've got something to counter the jibe about our having raised taxes by 7p in the pound in this parliament. Now I can go back to my constituency and look my chairman in the eyes.

The morning after ... Financial markets are expected to go into a nosedive today as the full extent of Kenneth Clarke's audacious gamble becomes apparent. They've taken fright at the extent to which the Chancellor appears to have thrown in the towel on improving the public finances at a time when most City forecasts expect the public sector borrowing requirement to be a whopping pounds 30bn this year - half as much again as the Treasury was forecasting in the last Budget.

A year after ... Kenneth Clarke's big gamble looked highly irresponsible at the time, but like his play on interest rates in mid 1995, it all turned out a lot better than the pessimists feared. The boost to consumer spending given by the tax cuts helped the economy through a nasty period of weakness, which also meant that the Chancellor was able to get at least some of the interest rate cuts he wanted. With hindsight, we can see that Mr Clarke simply relaxed a fiscal stance that had been set too tight. But with the budget deficit still high, there's no room for a further cut in taxes, so Mr Clarke essentially blew this year's tax cuts with his last Budget. Good Economics

The speech: I've always said that good economics is good politics, and that's what this Budget is all about. With this year's budget deficit running close to pounds 30bn, or 4.5 per cent of gross domestic product, we simply cannot afford tax cuts. That time will come - but only when it has been earned through more hard grind. That said, I am concerned about the possibility that the next few months may see an actual decline in activity. So what cash I've got will boost public investment and help the beleaguered construction sector. And I shall be expecting the governor of the Bank of England to take note of my fiscal prudence when we next meet.

The subtext: There's just no room to cut taxes with the PSBR overshooting the way it has this year. We'd be taken to the cleaners by the financial markets and the pound could easily go into free fall. I will have to tough another year out and save up the good news for the next Budget. We'll just have to keep our fingers crossed that the Grim Reaper doesn't pick on any of our MPs - and there aren't any more Alan Howarths lurking on the backbenches.

Hear, hear ... The Chancellor has thrown away our one remaining chance of pulling back at the polls. Labour is going to have a field day, contrasting its commitment to a 10 per cent starting rate of income tax with all this "iron Chancellor" stuff. Ken didn't need to be tough on taxes to get interest rates down - he could have just sat on the governor as he did over the summer. With this Budget, I won't have to look my constituency chairman in the eyes - he'll have resigned, and the rest of the local party with him.

The morning after ... The City's financial markets are expected to continue in party mood today as Kenneth Clarke's surprisingly tough Budget opens the door to a big move down in interest rates. The Chancellor doesn't meet Eddie George until 13 December, but as far as the City is concerned, he doesn't have to - it's a foregone conclusion that rates will fall. But share prices have been more muted on fears that Mr Clarke could have overdone the hair-shirt and so reduced the Tories' chances of re-election.

A year after ... Kenneth Clarke's tough Budget was received in stony silence by the Tories when he delivered it. But in retrospect, the tough stance he took opened the door to a cut in interest rates which revived the economy and drove down public borrowing. Now he'd be terrifically well-placed to deliver the goodies to his party - except for one thing. Gordon Brown is now Chancellor, and he can't believe his luck. Squaring the Circle

The speech: I'm announcing measures today that continue our progress towards a balanced budget and I'm cutting taxes into the bargain. How? By cutting spending. Today I'm announcing a major expansion of the private finance initiative, so that more public investment can be funded by the private sector. As a result, I'm able to project a ratio of public spending to national output of below 40 per cent. We believe in rewarding enterprise so I've cut the burden of capital gains tax and raised the threshold at which inheritance tax becomes payable. And most of all we believe in cutting income tax, so I've brought the basic rate down by 1p and widened the lower rate band by pounds 1,000. We're on the way to a 20p basic rate of tax.

The subtext: If only borrowing hadn't overshot this year - it's screwed up all my plans. I've had to wield the axe on investment projects no one in their right mind would be cutting. I'm now going to have to talk a lot of nonsense about the private finance initiative. But I had to convince the City I was serious about the public finances in order to make sure there wasn't a run on the pound. By the way, I only managed to get the ratio of spending to GDP down below 40 per cent by a bit of ingenious redefinition - we now count dividends and interest that the Treasury receives as spending: nice one.

Hear, hear ... He's done the minimum he could do. At least we've regained the initiative on taxes and can say they're now going to fall in future years. My big worry is how much stick we're going to get from all these spending cuts. The constituency party won't be celebrating - but at least they'll still be there.

The morning after ... The City gave the green light to a Budget that combined a tough line on spending with a modest giveaway. Few analysts think that the Government will be able to cut public expenditure by as much as Mr Clarke claims, but most accept that for once a government is not splashing out on spending in the run-up to an election. Mr Clarke will get his reward before long in the shape of an interest rate cut that is sorely needed to revive a flagging economy.

A year after ... Once again, Kenneth Clarke is presenting a Budget billed as the Tories' last white hope. Remember the last one in 1995? It didn't help, because the idea that pulling a few tax and spending levers can shift public opinion is a fantasy. The Tories remain in trouble because they've been in office too long and Labour under Tony Blair is seen as a credible alternative. The Chancellor has done his best, but the Conservatives have never been able to recover from Black Wednesday.