The move came as the Post Office revealed a price freeze on first- and second-class letter post until March 1996 or beyond. A spokesman said it had to be competitive to fight the threat from fax and telephone.
The relaxation on rules governing the Post Office come after many months of concern over its future. Its management has been lobbying fiercely against the "crippling" external finance limit - a seemingly arbitrary amount taken by the Treasury each year.
The EFL absorbed £182m of £306m pre-tax profits in 1993/94 and rose to £226m last year, for which profits are yet to be announced. The Government will in future set the EFL at about half projected profit after tax, allowing the Post Office to plough more back into the business.
Michael Heseltine, President of the Board of Trade, said: "While no responsible government could undertake to ring-fence the Post Office entirely from the pressure on public spending, I am prepared to agree that in future we will aim to set the EFL at about half the Post Office's forecast post- tax profit." He also said that formal restrictions on Post Office investment and detailed scrutiny by the Treasury of individual projects would be replaced by a "more strategic corporate plan".
The statement was attacked as "a modest step and pathetically slow in coming" by Dr Jack Cunningham, shadow secretary of state for trade and industry.
He called for the Post Office to be established as a public limited company within the public sector and to be freed from the constraints of the public sector borrowing requirement. "That would end for once and for all this nonsense. There is no doubt that to safeguard the future of the Post Office we would take such a major step," he said.
"What the Government is doing is no great leap forward. It does not go nearly far enough."
Mr Heseltine also said the Post Office might in future have more freedom to form joint ventures and to move into new markets related to its existing business.
He would "consider" requests but would want to see these related to making much more use of the Government's private finance initiative.
He stressed that funds for any expansion must come from increased efficiency and not higher prices. "There must be real pressure on the efficiency of the Post Office. I am about to appoint consultants to carry out a performance review of the operations of the Post Office."
Mike Heron, chairman of the Post Office, gave a guarded welcome. "After more than 30 months of government uncertainty over the future of the Post Office, which has benefited no one except our foreign competitors, the door is now ajar," he said.