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The concrete around next month's Budget is still wet, although it will be setting fast following yesterday's meeting of the Treasury ministers at Dorneywood. But the pressure groups will press their cases to the bitter end.

The rumours about a possible commitment to pay nursing fees (but not the cost of accomodation) for old people in homes suggest the Chancellor is still being pressed to ease the fears of middle class Tory voters that they will lose their inheritances if their parents' homes have to be sold to pay for care.

Mindful of its political clout the housing lobby too is still fighting gamely for measures to revive the housing market and prevent a further increase in negative equity. And the drinks lobby still lives in hopes of cuts in duty to stem the flow of cross-Channel booze.

There is always the possibility the Chancellor will look for a few increases in indirect taxes to help make room for headline cuts in direct taxes. Over-indexing tax on petrol is more or less guaranteed, and the insurance industry is currently working itself into a lather about the possibility the tax on insurance premiums will double from 2.5 per cent to 5 per cent and lose them business.

But it now seems certain that the best we can hope for is a choice between some cuts in direct taxation, largely paid for by reductions in public sector spending, or a cut in interest rates. It would be too much to hope for both because the currency and bond markets would react badly if the Chancellor appeared to be playing politics with inflation and the public sector deficit.

So which should we be looking for? Tax cuts would renew the Government's rather tarnished commitment to lower taxes, an important consideration in an election where slogans could play a crucial part. Tax cuts will benefit everyone in work, rich and poor, borrowers and savers, and could encourage the missing feel-good factor, without which the Government's chances of winning the election appear slim.

But tax cuts are an inflexible instrument. Cuts announced next month would not take effect until April, and phased tax cuts covering the next two tax years would not be fully effective until after the last possible date for an election in 1997.

A cut in interest rates could at least be faster and more flexible. It would take effect more quickly and could be increased or reversed at short notice. It would benefit borrowers in general and home-owners in particular, and would benefit business. But it would not suit savers, whose goodwill is equally important to the Government.

And because they benefit debtors (who simply want to reduce their debts) more than creditors (who might actually spend the money) interest rate cuts pound for pound are probably less effective than tax cuts in stimulating consumer spending, which, as the latest retail sales figures show only too clearly, is the sector that has so far failed to benefit from the recovery. It is also the sector where elections are won and lost. Put your money on direct tax cuts.

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