Major going for growth: Prime Minister's economic U-turn aims to create jobs and restore credibility within Tory party

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THE PRIME MINISTER has decided to go for growth and jobs in a total reversal of the policy he has pursued since taking office in 1990. He told News at Ten last night: 'A strategy for growth is what we need, a strategy for growth is what we're going to have.'

John Smith, the Labour leader, is to demand a full Commons statement on the fundamental policy change this afternoon. He is expected to welcome John Major's belated conversion to policies long advocated by the Opposition.

One of the keys to the new policy - the biggest and most significant U-turn of the many that have been delivered over recent weeks - is a decision to let private industry loose on public sector work frozen by Treasury cash curbs.

The relaxation of previous constraints could also give the green light to further cuts in interest rates, although John Major warned that the current round of public spending talks was facing hard decisions, which could mean a possible freeze on public sector pay and cuts in benefits.

As for public spending on capital projects, that will be protected, and the hard-pressed building and construction industry is expected to be allowed to initiate and finance work on road and rail projects shelved on Exchequer orders. Among other schemes, that could revive hopes for the Jubilee Line Tube extension.

The change of government policy marks a retreat from Mr Major's paramount priority of curbing inflation - in a clear attempt to put a stop to what one senior source described as 'open season' on the Government.

In his determined attempt to bounce back off the political ropes, Mr Major has also agreed to a more open review of the pit closure programme, and he has warned colleagues that he will not retreat on Maastricht ratification. He has told them that if people do not trust him, they had better find someone they do trust.

But it was the determined change of emphasis on economic growth that will revive his flagging credibility within the Conservative Party and, possibly, the country - if he delivers.

Mr Major used the opening question from a Tory MP at Prime Minister's Question Time in the Commons to signal the push for growth. 'We are seeking the right policies that will bring back not just recovery but recovery with lower inflation,' he said.

'I believe the reductions we have been able to make in interest rates and the increased competitiveness of the exchange rate will enable us to lead this country back to recovery to the low inflation and sustained growth we need.'

But more of the substance of the U-turn came later when a senior No 10 source said that when he was Chief Secretary to the Treasury, Mr Major had torn up 'arcane and theological' rules that had blocked private sector investment in public sector projects, without counting towards sacrosanct public sector borrowing requirement limits.

The source then added that all the other barriers that had been maintained by the Treasury's theologians would be shredded by Norman Lamont, Chancellor of the Exchequer, in his Autumn Statement on public spending next month - 'so that private industry can do what private industry wants to do'.

One Whitehall source was so stunned by the change of policy that he would not even rule out a limited release of some of the pounds 8bn that the Treasury still forces local authorities to hold from council house sales because of public sector borrowing limits.

Some ministers are also expecting a further 1 point cut in interest rates. They believe last Friday's

1-point cut marked the shift in policy towards a more freely floating pound, with less attention paid to the exchange rate.

'I was amazed how out of touch the Cabinet seems to have been with the extent of the recession in the real world. It is so deep, there is no risk of inflation. The Prime Minister has now got the message,' said one minister.

The abolition of Treasury rules will allow more private sector companies to bid for public sector schemes to boost the construction industry. The Treasury vetoes schemes which involve underwriting investment risks by the private sector. That rule is expected to go. The change could also involve pump-priming private schemes with public money.

Companies have been reluctant to come forward, but ministers believe the abolition of the Treasury rules will lead to more privately financed toll roads, bridges, and private railway lines. Companies will be encouraged to build shops in the inner cities with the guarantee of a two-year commercial lease by the Government.

Ministers arguing for growth say the test of Mr Major's leadership will come over the public expenditure review, nearing completion. A ministerial row is going on within the Cabinet public expenditure committee, known as EDX, over proposals to extend or raise value-added tax

One Government source said Michael Heseltine, President of the Board of Trade, and Kenneth Clarke, the Home Secretary, both on the committee, favoured increasing indirect taxes to compensate for falling tax revenues caused by the recession. But the Treasury is warning it would further depress demand and spending, and Mr Major is under pressure to step in and veto the idea.

While tax increases are most unlikely, and while Mr Major is determined to protect capital spending projects such as schools and hospital-building, the possibility of a public sector pay freeze was significantly not ruled out by Mr Major last night - opening up another political minefield as nurses and other public sector workers protest at the sacrifice they could be expected to make.

When the possibility of a public sector pay freeze was put to Mr Major in his ITN interview last night, he pointed to a recent deterioration in the world economic climate - hitting Germany and Japan as well as the UK. 'What then is the Government's job?' he asked.

'The Government's job is to shield this country from as much of those difficulties as possible, and build a strategy for growth; to put back into work those people who are not in work.

'Now that is what we will seek to do. That is the policy that we have.'

That meant tough choices ahead in the current spending round, but he believed that the public would accept that the priority was to make way for growth and save capital spending on the infrastructure because of its impact on employment. 'I think the conscience of this nation will regard those as the right choices to make in present circumstances. 'Not easy, I agree with you, and I don't want anyone to be the whipping horse of difficulties. But we have to make those choices in the general interests of building the proper level of growth, the proper level of recovery.'

Government in crisis, pages 2, 3

Lords' debate, page 4

Jubilee Line jewels, page 17

Leading article, letters, page 20

Tories saying it now, page 21

Commentary, page 23