Alan Budd, chief economic adviser to the Treasury, will consider quitting if he loses a bitter departmental row over tax cuts.
As the Chancellor, Kenneth Clarke, held a crucial budget meeting yesterday, Mr Budd and Sir Terry Burns, the department's permanent secretary, clashed over the advisability of reducing taxes in the Budget. Close associates say Mr Budd will probably opt for early retirement if the Chancellor goes ahead with a tax giveaway on 28 November.
Mr Clarke has repeatedly said he will not play fast and loose with the public finances. In a speech to businessmen last month, he said: "Nobody should assume that tax cuts are safely in the bag."
However, pressure for lower taxes from the Conservative backbenches has been intense, despite the fact that recent figures have shown that government borrowing so far this year is running above last year's levels. This means tax cuts are likely to be accompanied by lower spending plans, but most economists - including Mr Budd - are sceptical about the Government's chances of meeting even tougher expenditure targets.
Mr Budd does not believe that the state of the economy justifies lower taxes. He argues that it makes no sense to cut taxes straight after increasing them for two years in a row. In addition, he thinks it is essential to keep the government finances on an improving trend.
Sir Terry, on the other hand, accepts the argument that there is a political need for tax reductions this year. In his view, a modest cut would not do any lasting harm to the public finances. The battle between the two camps was still raging yesterday when ministers and officials held the last of the Treasury's series of pre-Budget meetings at Dorneywood, Buckinghamshire.
The broad judgements about taxes and public spending should have been made at the beginning of the summer, at a meeting at Chevening, the Foreign Secretary's country residence. Civil servants usually spend the summer drawing up proposals that fit the framework settled at Chevening. This is so that decisions on more detailed policies can be taken at the autumn Dorneywood meeting and the subsequent meeting of the Cabinet's economic policy committee. This year, the row means that the timetable has slipped.
The borrowing requirement set for this financial year in last year's budget was pounds 21.5bn. The Treasury increased this to pounds 23.6bn in its summer forecast. City economists now expect the figure to be nearer pounds 30bn - not a dramatic improvement on last year's pounds 35.9bn.
Mr Budd is due to leave the Treasury in 18 months' time. He replaced Sir Terry as chief economic adviser when the latter was promoted to Permanent Secretary.