Lamont to say tax cuts will go on: Tory hopes hinge on Brighton speech

AN EMBATTLED Norman Lamont will this week reaffirm the Government's goal of cutting taxes and reducing inflation amid continuing ministerial divisions over the public spending round and future economic policy.

The Chancellor will try to reassure a fractious Tory conference on Thursday that the Government remains committed to cutting taxes, despite signs that some ministers would prefer to leave the door open to increasing them.

With little or no prospect of early cuts in interest rates, ministers have agreed in principle to an emergency measure to help the housing market. It would remove restrictions that prevent building societies making extra loans to home-owners caught in the 'negative equity' trap - where the value of a property has fallen below that of the loan secured on it.

It would help home-owners immobilised by the trap to 'trade down' by allowing the building societies to make unsecured loans of more than the present limit of pounds 10,000. Some details are still being negotiated. The building societies hope that insurance companies will agree to transfer existing mortgage indemnity polices to new properties.

Mr Lamont will not explicitly rule out tax increases in his speech. But the tone of his draft makes clear that he regards the continued drive to reduce public spending as the principal way of ensuring that they do not happen.

Some ministers are arguing, by contrast, that tax increases should not be ruled out, given that borrowing is now expected to rise to pounds 40bn in 1993-4 - pounds 8bn up on the last Budget estimate of pounds 32bn. Although the Government is committed not to increase rates, the extension of VAT to cover zero-rated commodities such as fuel could remain an option for next year's Budget.

Delegates gathering in Brighton tomorrow for the conference face tense debates on the economy and Europe. But senior Conservatives promised yesterday that Brighton would launch a turnaround in the Government's sagging political fortunes. 'The fight-back starts here,' said one of John Major's senior party allies.

Despite their travails, Tories have done significantly better in council by-elections than their opponents since April, scoring 20 net victories compared with 14 losses for Labour and three for the Liberal Democrats.

John Major strongly defends the Chancellor's handling of the sterling crisis in an interview in today's Sunday Express. 'Norman Lamont handled the situation in the classic way,' he said. 'He handled it in exactly the same way that any other Chancellor or any other government would have done.' The Prime Minister's personal approval ratings have fallen to their lowest level - from 47 percent to 33 in the last month, according to a MORI poll in today's Sunday Times.

Ministers accept that interest rates are unlikely to be reduced in the foreseeable future and that Mr Lamont may come under pressure to raise them if the pound continued to slide.

At Brighton, Mr Lamont will promise that the Government remains committed to reducing inflation. He will also emphasise its continuing commitment to progressive reduction of taxes between now and the next election, and insist that rigorous control of public spending will remain the main instrument of reducing the pounds 28bn public sector borrowing requirement. There is still no agreement on how to meet next year's planning total of pounds 244.5bn.

Details of a new monetary policy - to replace membership of the European exchange rate mechanism - are likely to be given to the Treasury select committee when Mr Lamont is questioned about 'Black Wednesday' on Monday week. Treasury sources had indicated that the Chancellor would wait until his Mansion House speech on 29 October, but announcement of a new policy is now regarded as more urgent.

Mr Lamont will make a fringe speech in Brighton strongly defending the Maastricht treaty as a self-proclaimed Euro-sceptic. He will exhort other Tories who fear too close European integration to back the treaty as a marked improvement on the Single European Act.

Conservative tensions over Europe have been stoked by the serialisation of the memoirs of Lord Lawson, the former Chancellor. He claims that Lord Tebbit, a staunch opponent of the ERM, was in favour of joining in 1985. Lord Tebbit said this was 'not correct'.

The memoirs also recalled Lord Lawson's initial doubts that Mr Major was 'up to the job' when he was appointed Chief Secretary to the Treasury - Lawson's deputy - in 1987.

Meanwhile, the European Commission vice-president, Martin Bangemann, told a meeting of his Free Democratic Party yesterday that European Community members who refuse further integration should consider leaving the 12-nation group. The EC's highest-ranking German official said Europe could only develop further if a majority of its citizens supported the goal.