The Week in Politics: Michael Howard, tax pledges and a £35bn pot of Tory gold

For Michael Howard, the moment of truth has arrived. Announcements to be made by the Tories over the next couple of days will define the general election battleground and the party's prospects.

For Michael Howard, the moment of truth has arrived. Announcements to be made by the Tories over the next couple of days will define the general election battleground and the party's prospects.

The battle lines are becoming clear, and they matter. For all the talk about the two main parties converging and Labour stealing Tory clothes, a crucial divide will dominate the four-month campaign that began this week. The Tories will match Labour's spending in areas such as health and education but will offer some tax cuts. Labour will put investment in public services first.

At first glance, the Tory offer looks too good to be true. After all, the Opposition has been warning us for months that Labour will raise taxes if it wins a third term. Plenty of economic experts think so too. How, then, can the Tories match Labour on frontline services and still find room to reduce taxes?

Enter David James. Not the England goalkeeper, but the company doctor who helped the Millennium Dome project recover and is now trying to revive an ailing patient that has been flatlining at around 30 per cent in the opinion polls since the Black Wednesday European exchange rate mechanism crisis in 1992. Mr James has been rooting out waste in Whitehall departments and his final tally will be revealed tomorrow - about £35bn of savings.

Again, it seems too good to believe. Voters might think that a lot of the money they hand over to the Exchequer is wasted, but surely, if there was a £35bn pot of gold hidden in Whitehall, Gordon Brown would have found it by now. Indeed, the Chancellor has his own businessman turned wastebuster in Sir Peter Gershon. His efficiency review produced a plan to cut 80,000 civil service jobs. It has also given Labour an insurance policy against the Tory attack: Sir Peter says that to go "further or faster" than he proposes "would put at risk the delivery of public services".

To be fair, the Tories admit their £35bn treasure chest is not quite what it seems. About half of the booty has already been grabbed by shadow cabinet members. To match Labour on health and education, the Tories announced they would freeze other areas of spending. In the Budget that followed, Mr Brown ruthlessly exposed the fact Labour would outspend the Tories in sensitive areas such as defence and overseas aid. To spare their blushes, the Tories have had to match Labour - and have raided the James war chest. So perhaps only half of the £35bn is left.

Nor can the Tories devote all that remains to tax cuts. After attacking Mr Brown's borrowing spree, they can't say they would continue it. So they will use a fair amount of their loot to reduce government borrowing, leaving little more than £5bn for tax cuts. Oliver Letwin, the shadow Chancellor, will put a figure on the tax cuts on Monday.

I believe Mr Letwin's priority will be to cut income tax for low and middle income groups. The most likely option is to take out some of the 1.35 million people sucked into the top 40p rate of tax since 1997 by raising the £36,000 income threshold at which it bites. That would be a political Exocet aimed at Middle Britain and the natural Tories wooed by Mr Blair in 1997. I suspect the Tories will also devote some of their treasure chest to keeping down council tax and inheritance tax.

A fierce internal debate is raging about when the Tories should bring their dance of the seven veils to a climax. With the party making no progress in the polls, some frontbenchers want an immediate announcement so they can hammer home the party's unique selling point until 5 May. But others, including Mr Letwin, want to delay it until after Mr Brown's Budget in March. Mr Letwin got his fingers burnt by Mr Brown last year; he knows the Chancellor might steal the Tories' best cards if they have already declared their election hand. So we will have to wait a bit longer for the detail of the Tory tax cuts.

Will the Tories be believed? Privately, they fear the voters will be sceptical, if not downright cynical. Disillusion with the Blair Government has contaminated the voters' view of all politicians.

A recent poll finding worries the Tories. Mr Howard has made little impact with the voters. To many, he is invisible, his party written out of the script.

It is true many people will not focus on the election until it comes. Surely by playing his best card - on tax - Mr Howard will finally get noticed. But time is running out for the Tories and, for all Labour's troubles, I suspect Mr Howard will struggle to persuade the voters they can have their tax and spending cake and eat it.