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The Chancellor redeemed his reputation for fiscal prudence very cheaply this week, simply by leaving base rates unchanged at a time when the City had persuaded itself that he was about to order a further quarter- point cut in the teeth of opposition from the Governor of the Bank of England.

Simply by holding the line, the Chancellor has reassured the City and the foreign exchange markets, for the time being at least, and avoided the risk of an open split with the Governor.

The economy, while not exactly firing on all cylinders, is moving forward on most fronts. Consumer spending is growing fastest but investments and exports are relatively buoyant, and residential property prices, the prelude to faster economic growth and rising inflation, are rising.

Many pundits think there is no longer any scope for a cut even in nominal interest rates, with house prices recovering gradually and unemployment falling (even if it still represents a massive waste of resources and a burden on the budget). If there is to be another cut in rates, moreover, the timing is wrong. It will have more impact either around the time of the Conservative Party conference next month, or around the time of the Budget at the end of November, when a cut in interest rates would either pad out a small cut in income taxes or even act as a substitute for a tax cut.

In fact, the only case for a cut this month would be if the Government decides on a snap election in the autumn, and this looks unlikely with the Labour lead in the polls still looking solid and John Major's gut- instinct to wait until the spring .

Meanwhile, New Labour has played true to type this week by going further in the direction of tax-cutting than the Tory Chancellor. A basic rate of 15p or even 10p sounds irresistible, although its value depends how wide the new bottom band is and whether or not it replaces or absorbs the existing 20p band, which itself is increasingly anachronistic. It is only 4p below the basic rate, although it is also the standard rate for dividends and savings.

New Labour's plans are designed to help the lowest-paid of course, and a new low starting rate for tax would have much the same effect on take- home pay as a minimum wage. Paying 10p instead of the current 20p on the first pounds 3,900 of taxable income earned, after deducting allowances, would be worth pounds 7.50 a week to all workers, while an extra 50p an hour on low wages would be worth pounds 14.40 more (net of 20p tax on a 36 hour week).

Either benefit would be useful, but it might seem too much to offer both, and the main question is which to choose; one comes out of the taxpayer's pocket and is a universal benefit, the other is paid by employers and specifically targets the poorly paid.

To complicate the argument still further, the biggest burden low-paid workers have to bear is not income tax but national insurance, which docks 10 per cent of everything they earn above pounds 61 a week, assuming they are not contracted out of Serps. It means that true tax rates are 10 per cent higher than the published rates, but no Chancellor has yet dared to do the logical thing and merge tax and national insurance systems.

But the Labour Party's uncoordinated half-promises do offer Kenneth Clarke the opportunity to do a little upstaging of his own when he delivers the Budget at the end of November.

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