Clarke targets defence to fund tax cuts

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Kenneth Clarke has set his sights on deep cuts in Michael Portillo's pounds 21bn defence budget, as part of the spending squeeze to make way for tax cuts in the Budget.

The move has caused alarm among senior Tory backbenchers who see it as a fit of pique by the Chancellor over his failure to block a series of major defence orders costing over pounds 3bn. Mr Clarke wanted a thorough review of the defence orders for a Nimrod replacement, a "tank-busting" missile, and a "mini cruise" missile for the RAF. But he was overruled after the intervention of John Major.

Mr Major ordered Michael Heseltine, the deputy Prime Minister, to settle the row between the Treasury and the MoD, and Mr Portillo was given the go-ahead to announce the orders for all three projects, securing thousands of jobs in the defence industries in the run-up to the general election.

But senior Treasury sources have told The Independent that Mr Clarke is determined to stage a fight-back in September, when ministers resume the hard bargaining over their budgets for next year.

The Chancellor, who will chair the Cabinet EDX committee on public expenditure, is keen to reduce defence spending in other areas. Tory MPs have already warned Mr Clarke that defence has been cut to the bone in recent years, and there is no more fat left. They fear that further cuts will result in a reduction in Britain's defence capability.

The MPs are planning to press their demands for spending to be protected in a full-scale defence debate in the week the Commons returns after the summer recess. But Mr Clarke's friends believe that Mr Portillo, as a Thatcherite, should be expected to follow his principles by reducing his own budget.

Mr Portillo is arguing that he has gone ahead with the sale of married quarters homes, in the teeth of fierce opposition from Tory MPs, to give the Treasury has an additional pounds 1.6bn for tax cuts.

The MoD denied it was spending millions of pounds of taxpayers' money upgrading and refurbishing the homes before they are sold. One report said an internal MoD memo had stated "the brakes are off" spending. But a statement said any repairs were within the budget already allocated.

The preferred bidder may be chosen this week with the final decision expected in early September. Four rival groups are in contention.