Clarke clears the path to tax cuts

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Kenneth Clarke, the Chancellor of the Exchequer, yesterday unmistakably paved the way for tax cuts in next month's Budget with a promise that he was "looking forward to it a lot more" than either of his last two Budgets.

Mr Clarke, addressing the Conservative Party conference in Blackpool, pledged that the Budget would "address Middle England" and would be based on "traditional Tory values".

He recognised that "after you have loyally supported all the hard work that has been put in, the time has come for some reward in the next Budget. In the immortal words of Francis Urquhart in House of Cards: You may think that - but I couldn't possibly comment."

But even as Mr Clarke strove to lift the spirits of the conference with the prospect that the November Budget would launch the first in a rolling programme of tax cuts, a shock jump in inflation threw a spanner in his budgetary arithmetic and depressed hopes of an early cut in interest rates. Retail price inflation rose in September from 3.6 per cent to 3.9 per cent, its highest since June 1992.

The RPI increase was particularly unwelcome to the Chancellor because the September figure is used to uprate pensions and social security benefits to take account of inflation. According to the Department of Social Security, the Government will now have to find pounds 2.8bn to finance the inflation uprating of benefits next financial year, 1996/97, pounds 650m more than had been projected at the time of the last Budget.

The extra expenditure is necessary because the Treasury was unduly optimistic about the outlook for inflation when it prepared the public spending plans last year. At the time of the last Budget, it assumed that retail price inflation would be 3 per cent this September rather than the 3.9 per cent it turned out to be.

Hopes of an early cut in interest rates also receded in the light of the disappointing inflation figure. As recently as last week, the City was expecting almost a quarter-point cut in base rate by December from its present level of 6.75 per cent.

Sources close to Mr Clarke insisted that he was not giving any specific hints about the Budget and that his ability to reduce taxes depended on Treasury success in the current highly problematic public spending round. He emphasised that taxes would only be cut "when it is in the interests of the British economy to do so".

He added that "when we cut taxes it will be for keeps. [Tony] Blair is terrified that we might be able to do it - that we might be able to cut taxes."

Inflation setback, page 23