and DIANE COYLE
John Major yesterday reinforced Tory hopes of significant tax cuts in Tuesday's Budget as the CBI sounded a note of caution by advising Kenneth Clarke, the Chancellor, to be prudent to avoid the need for a future rise in interest rates.
The Prime Minister confirmed the Government's target of reducing the basic rate of income tax to 20p and added: "I look forward as soon as it is affordable to making some progress in that direction."
Mr Major was careful to say that there were "a number of ways" the target could be reached, which included reducing the basic rate or widening the income band at which taxpayers only paid 20p in the pound.
Mr Major clashed at Question Time with Labour leader Tony Blair over his government's record on taxation. Mr Blair challenged the Prime Minister to "explain or withdraw" his remark earlier this week that 21 tax rises since last election were to protect the vulnerable. He said the Tories would be remembered at the next election as the party of "broken promises and unfair taxes".
But Mr Major countered: "Since I became Prime Minister, take-home pay after inflation has risen by pounds 600 a year in today's prices." He said real disposable income had risen too.
Mr Major's hint came as Brian Mawhinney, Tory party chairman, accused Gordon Brown, the shadow Chancellor, of using his plan for a windfall tax on the privatised utilities as cover for a "spending spree". The tax could not pay for all Labour's promises, and would in any case be a one-off levy. "The reality is that only a massive tax increase will be enough to pay for these promises," Dr Mawhinney said.
But Andrew Smith, Labour's Treasury spokesman, accused Dr Mawhinney of "double-counting" Labour's proposals.
Mr Major also said it was "rather odd" that Mr Brown had not mentioned his new long-term target of a 10p in the pound lower rate in the Queen's Speech debate on Wednesday. He said: "It rather confirms my view that it is rather more of a gimmick than a proper policy option."
The CBI's economists trimmed their forecast for growth to 2.5 per cent next year from an expected 2.7 per cent this year, but predicted a faster pace of expansion in 1997.
The forecast assumes that modest tax cuts announced next week are paid for by reductions in government spending. It predicts that base rates could then fall by half a point early next year at the same time as inflation declined towards the Government's 2.5 per cent target. On the other hand, a tax giveaway of pounds 4bn not financed by reducing expenditure would take inflation above the target. This would bring the danger of higher interest rates.
CBI urges prudence, page 25