Budget Special: Has canny Ken blown it?

Kenneth Clarke yesterday told the country and the Conservative Party that he was not going to play Santa Claus or Scrooge in a Budget seen by his own backbenchers as too responsible to be an election winner.

The Chancellor of the Exchequer told the Commons: "I have one overriding aim - the lasting health of the British economy."

The Tory high command hopes the prospect of another five years of steadily growing prosperity will be enough to swing the electorate behind John Major.

Their message was that real take-home pay for the average family, including yesterday's Budget changes and an "assumed" pay rise, would add pounds 370 a year or pounds 7 a week to the average pay packet in the year from next April - after the next election.

But the Labour leader, Tony Blair, told the Commons: "The Conservatives, who fought the last election on the promise they would cut taxes, will, after all the changes made today, leave the average British family pounds 2,120 worse off in tax.

"The Chancellor announced a crackdown on tax cheats. I think he should start with the Conservative Party after 22 Tory tax rises."

The Labour attack will be reinforced with a new poster campaign today, building on a recent poll in which more people believed that Labour would set a lower overall tax rate than the Conservatives.

Mr Clarke's Budget - as leaked overnight to the Daily Mirror - included a 1p cut in the standard rate of income tax, down to 23p in the pound; the lowest rate for 60 years.

But even without the leak, none of the individual measures would have been enough to make a dramatic impact.

Mr Clarke adopted a characteristically relaxed style when delivering the Budget, regularly sipping from a large glass of whisky and water. The previous night he had decided to go for a curry in the small hours, leaving Whitehall in turmoil over the leaked contents of his Budget, and Downing Street ordering a top-level inquiry. He had a private pre-Budget meal with some Downing Street officials, dropping into the Pimlico Tandoori in west London.

With 15p on a packet of cigarettes, 3p a litre on petrol and diesel, 26p a bottle off spirits, an increase in insurance premium tax to 4 per cent, a doubling of air passenger duty, pounds 5 on a car tax disc, a phase- out of profit-related pay, the Budget included a total of pounds 2bn tax cuts. That was balanced by pounds 2bn worth of spending cuts, including cuts in single- parent benefit and cuts in roads and London Underground investment programmes - and a 15p increase in prescription charges bringing them to pounds 5.65 an item.

Mr Clarke said: "Despite all the difficulties, we have been able to reduce public spending plans over the next three years by a further pounds 7bn in this Budget."

However, there were increases for education, health and law-and-order programmes, with an extra pounds 1.6bn for patient services, pounds 830m more for schools, and a rise of pounds 450m for police and prisons.

Since he became Chancellor in 1993, public spending had been cut by pounds 24bn through to next year, and many of the cuts are yet to emerge from the small print of the Budget Red Book.

As for the tax front, Labour and the Liberal Democrats said last night that all the Treasury calculations excluded the impending impact of rises in council tax.

The Liberal Democrat spokesman Malcolm Bruce said: "Mr Clarke is up to his old tricks again. The money for education does not come from the Government, but from a pounds 700m rise in council taxes." Mr Blair said close inspection of the Budget showed that the Tories were back to their "old tricks". Council tax was due to rise by about pounds 4bn over the next three years, or 6 per cent.

Phasing out profit-related pay would be the equivalent of 8p on the standard rate of tax for some low-paid workers. "Give with one hand, take with another - that's the record of the Tories over the years."

The official tax burden table in the Treasury Red Book shows a remorseless increase in the standard measure - non-North Sea taxes and National Insurance contributions as a percentage of gross domestic product - moving up from 36 per cent in the current year, 1996-97, to 38 per cent in 2001-02, compared with 34.75 per cent in 1978-79.

As for the overall political judgement on the Chancellor's neither-Santa- nor-Scrooge performance, the Conservative backbencher Keith Mans told The Independent last night: "He has handed on a very good set of economic statistics to whoever wins the next election."

But in economic terms, the Chancellor achieved the essential Budget hat-trick of reducing taxes, spending and government borrowing simultaneously.

The net tax "giveaway" amounted to a cautious pounds 735m, favouring people on middle incomes and upwards. Those on low incomes will lose out as a result of higher taxes on cigarettes and the abolition of the lone-parent premium from 1998.

Mr Clarke's caution on the tax front got a warm welcome from much of the business community. But there was a more mixed reaction in the financial markets.

A majority of analysts reckon that the Chancellor will still have to raise interest rates once more before May if he is to have any hope of hitting the Government's inflation target. However, Mr Clarke's prediction that government borrowing will fall by more than pounds 7bn to pounds 19bn next year was welcomed.

The Chancellor made it clear in his speech that this reduced borrowing forecast was intended to take the pressure off interest rates. This suggests he will certainly hold out until at least the end of January, when key figures on the economy's growth in the final quarter of this year will become available.

Even so, shares fell during the speech. City scepticism focused on whether the Government would be able to deliver on its lower spending plans and crackdown on tax avoidance and benefit fraud.

Kevin Darlington, an economist at the brokers Hoare Govett, said: "The Governor of the Bank of England is not going to be racing to congratulate Mr Clarke. It has not stifled the interest rate debate."

Most business leaders - at least outside insurance and travel, hit by significantly higher taxes - were a bit less grudging. The reduction in the uniform business rate made small businesses ecstatic.

Bigger companies gave mixed reviews. Andrew Higginson, head of economic affairs for the British Retail Consortium, said: "The fact the Budget was neutral is good news because things are going quite well at the moment."

However, David Richardson, president of the British Chambers of Commerce, said: "A penny cut in income tax will do nothing for business and investment."