The Treasury has provoked a Cabinet battle by demanding that the index-link with pensions should be broken. That would require an emergency Bill. Ministers are also considering cutting or freezing income support, which is not protected by legislation.
On the eve of his Conservative Party's conference in Brighton, the Prime Minister said that the turbulence in the exchange markets had hit the lira, the pound and other currencies. 'These things happen from time to time. I don't think people should get unduly panicked about it.'
Challenged to explain the Government's exchange rate policy, Mr Major said: 'Wait and see what the Chancellor is going to say . . . We made it clear that the centrepiece of our economic policy remains to get inflation low and keep it low. There is more than one way of doing that.'
At a dinner later, Mr Major told party agents the Government remained committed to low inflation and low taxation. That was intended as an assurance that it will not raise taxes to find a way out of the crisis, but party officials said it was not a 'blanket promise' that tax increases were ruled out.
The falling pound will intensify the pressure to take unpopular decisions in cutting public spending, including a freeze on public sector pay. Ministers are not ruling out increasing interest rates.
Facing one of the most troubled party conferences in years, Mr Major said: 'This is a decisive time for Britain. We must make difficult choices to shape our future. Sometimes it is necessary to tell home truths. That is what the people of Britain expect of us and that is what we will do.'
The uncertainty about sterling could force the Chancellor to set out his economic and monetary policy in his speech on Thursday.
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