In a blunt defence of his anti-inflation strategy Norman Lamont emphasised to fellow finance ministers in the Group of Seven industrialised nations that his scope for further interest rate cuts had run out. At the same time Mr Lamont has come under pressure from senior Cabinet colleagues to begin tackling the borrowing total by raising some taxes in the Budget next month.
The Chancellor yesterday appeared to show sympathy for this view. After the G7 talks he said that fiscal policies had to take exchange rates into account. While it was correct to allow the budget deficit to swell with recession, 'at the end of the day countries have to bear regard to the overall long-term fiscal position.' That will be taken as a sign that he shares international concern that Britain's borrowing requirement is becoming unacceptably high.
British officials said that the other industrialised countries shared their belief that Britain would have the fastest growth rate in Europe next year. The Chancellor accordingly gave the impression that, even if the German Bundesbank cuts its rates soon - which G7 officials say is increasingly likely - he would leave Britain's unchanged. The current level of rates, Mr Lamont said, was consistent with a sustainable recovery.
Although wide differences remain within the Cabinet on how far he should go in raising taxes, those most concerned about the pound's value are urging him not to wait until November before taking action.
Mr Lamont's painful choice between attacking the deficit and stimulating recovery was made no easier by a renewed bout of speculation about a summer reshuffle that could remove him from the Treasury. But with Mr Lamont already committed to raising pounds 750m in vehicle-related duties to pay for the cut in car tax last autumn, a growing number of ministers expect him also to begin extending VAT to such zero-rated goods and services as fuel, public transport and possibly newspapers.
Some believe he may have to raise taxes by more than the bare minimum required to pay for his planned employment package and help for small businesses, though with a slender Commons majority he will be reluctant to freeze income tax allowances.
Any VAT change could be accompanied by social security help to ease the burden on the poor, who would be hit hardest by the new charges.Reuse content