One leading friend of Lady Thatcher said the former prime minister had told him: 'We have got the right prime minister and he must lead us into the next election. Despite my feelings on Europe, the party must have no musical chairs. We have every chance of getting out of these problems and the last thing we need is another leadership contest.'
Lady Thatcher told ITN: 'There can be no question of a leadership challenge at the moment. Any such challenge would be ill judged and ill timed.'
Her support for Mr Major, although equivocal, will be seen as part of a move by the Thatcherite right to bolster the Prime Minister's position so as to stop Kenneth Clarke, the Chancellor, replacing him next year.
Leaders of the Thatcherite 92 Group said last night there was 'almost unanimous support' for the Prime Minister at a meeting of more than 55 MPs, although some expressed dissent over his leadership.
However, the group warned that the Chancellor will face a rebellion if he proposes increasing direct taxes to reduce the pounds 50bn public deficit in his autumn Budget.
After the meeting to review the 'state of the party', the group's chairman, Sir George Gardiner, said: 'Many said it would be utter disaster if we reversed the policy of recent years and went for direct taxation.'
Some MPs who attended the meeting were prepared to support increases in indirect taxation, such as VAT. But the message they conveyed to Mr Major in advance of the public expenditure Cabinet on Thursday was that Mr Clarke - who will deliver a 'broad-brush' review of the economy in his Guildhall speech to the City tonight - should concentrate on cutting public expenditure to balance the budget.
Some Tories also attacked Sir Norman Fowler, the party chairman, for his outburst against Norman Lamont. Sir George said some MPs had said it was more damaging to the party than the former Chancellor's resignation statement.
The right-wing group dismissed suggestions that they had swung their support behind Mr Clarke. Many regard him as a 'taxer' and see the cuts in public expenditure as a litmus test.
Michael Portillo, the Chief Secretary to the Treasury, who is in charge of the detailed negotiations on spending cuts, had informal talks with Mr Clarke last night at Westminster.
Mr Portillo was said to have told backbench colleagues that he did not know where Mr Clarke stood on taxation - the issue which threatens to divide the Cabinet. The Cabinet battle over whether taxes should rise is looming, after Downing Street distanced itself from a warning by Michael Heseltine, President of the Board of Trade, that manifesto commitments might be broken.
The Prime Minister's office also said John Redwood, Secretary of State for Wales, was inaccurate when he said the manifesto ruled out an increase in income tax. Officials said it pledged progress towards a basic rate of 20p but the manifesto commitments would be kept.
The divisions on tax emerged on the eve of today's meeting between the Prime Minister, Peter Lilley, Secretary of State for Social Security and Mr Portillo to hammer out how much of the welfare budget should be sacrificed in the coming ministerial contest over sharing out next year's pounds 253.6bn public spending total.
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