Lamont to give taste of tax rises in store: Chancellor's Budget hand strengthened by jump in factory output as he begins long campaign to bring public spending under control

A BIG jump in factory output in January has provided further evidence that the recession may be ending, easing the Chancellor's task in beginning to bring public finances under control.

Norman Lamont is expected to tell the Commons this afternoon in his Budget that he is levying net tax increases of about pounds 2bn as the first step in a long-term programme to curb the Public Sector Borrowing Requirement.

The Chancellor is set to warn that taxes will rise more sharply in November's 'unified' Budget, provided recovery is safely under way. He will raise his forecast for economic growth this year from the 1 per cent projected in the Autumn Statement.

Yesterday's figures for factory output have strengthened the Chancellor's hand. Manufacturing production rose by 0.8 per cent in January to its highest level for 18 months, according to the Central Statistical Office. The increase was led by sharp rises in output of metals, electrical and electronics goods, drink, tobacco, textiles and clothing.

January's increase was the largest for a year, but does not point unambiguously to a recovery. The CSO warned that comparisons between December and January figures were distorted by Christmas holidays. The more reliable comparison of output in the three months to January compared with the previous three was unchanged.

Including a sharp drop in energy output, industrial production fell by 0.3 per cent on the month.

Lord Lawson, Mr Lamont's predecessor but one, outraged Tory MPs yesterday by effectively urging the Government to reverse the impact of his 1988 tax-cutting Budget. Speaking to a London foreign exchange conference, he said the Chancellor should not wait until November to raise about pounds 6bn from higher taxes on spending.

'If the Chancellor is to make significant early inroads into the budget deficit, he has no option but to increase tax substantially,' Lord Lawson said.

John Watts, Tory chairman of the Commons select committee on Treasury affairs, said such a policy would destroy recovery.

The Chancellor is expected to alleviate the most pessimistic City worries about the size of government borrowing by forecasting a smaller than expected PSBR for this financial year and next.

The Autumn Statement projected a pounds 37bn PSBR in 1992-93, with outside economists worrying that in the following year it could be pounds 60bn. But the Chancellor is likely to reaffirm his Autumn Statement projection for 1993-94 PSBR of about pounds 44bn.

However, Mr Lamont may go some way in Lord Lawson's direction, by levying VAT at 5 per cent on some zero-rated items, such as domestic power and fuel, newspapers, books and magazines, children's clothing and food.

The disproportionate impact on the poor may be offset by an extension of the 20 per cent income tax band levied on the first pounds 2,000 of taxable income.

He may also raise national insurance contributions for employees and employers. Abolishing the ceiling on NICS of pounds 420 a week and raising the employees' rate from 9 to 10 per cent would raise pounds 4.5bn in 1993-94.

Mr Lamont foreshadowed such a rise in last year's Autumn Statement when he said the rapid rise in social security benefits had damaged the financial position of the National Insurance Fund. He deferred an increase only because 'given the current weakness of the economy, I do not believe this would have been appropriate'.

Mr Lamont is also thought to have considered reducing the value of mortage tax relief by allowing homeowners to offset interest payments against the 20p, rather than 25p income tax band.

He has been keen to begin the attack on public borrowing with a clear statement of government determination to control spending and raise taxes. But John Major is thought to have been more cautious for fear that any fragile economic recovery might be undermined.

Gordon Brown, Labour spokesman on Treasury affairs, accused the Government of cutting aid to the unemployed by more than half. He said that in the 'first wave' of expenditure cuts, the Government was slashing pounds 100m in real terms from a range of schemes including regional assistance (down 12 per cent); one-stop business services (down 7 per cent); and help with business start-ups (down 15 per cent).