Tory call to drop tax cuts for all

Right urges package to woo disaffected voters

Kenneth Clarke, the Chancellor of the Exchequer, is being urged by Cabinet colleagues to aim a targeted package of tax cuts in his November Budget at core disaffected groups, including homeowners, pensioners with savings, small businesses and married couples.

Mr Clarke is under increasing pressure to respond to a new strategy taking shape on the centre and right of the Cabinet to use his Budget to extend a series of reliefs to these groups instead of making a simple cut in the standard rate of income tax.

The strategy, which was given fresh momentum by the Conservatives' disastrous local election defeats in May, would also include a measure - so far strongly opposed by the Treasury - to end the capping of local councils. This, it is argued, would ensure that Labour was not protected from the political damage caused by high-spending councils.

Despite strong resistance by the Treasury, there is a mounting consensus among both left-and right-wing ministers in favour of an end to capping after strong representations by leading activists in the party in the wake of the local elections.

The thinking behind the Budget strategy being pressed by several ministers, and some of the backbenchers preparing to give their views to the Chancellor in his annual series of pre-Budget meetings with MPs, is that targeted tax measures would help the most alienated sections of traditional Tory supporters. The task of winning back core Tory support was underlined by an unusually long, two-hour session of the Cabinet yesterday and by the release of a Gallup poll published in today's Daily Telegraph showing that a record 68 per cent of electors think that Mr Blair is "proving a good leader of the Labour Party".

Targeted measures would also demonstrate that the Government was prepared to use what room it had for tax cuts to underpin Conservative social goals of home ownership, marriage, personal savings, and enterprise.

The proposals being urged on Mr Clarke as he begins his annual preliminary session on the Budget with officials and advisers today at Dorneywood, Buckinghamshire, include:

t A significant increase - possibly to 20 or 25 per cent - in the current 15 per cent of mortgage interest tax relief to first-time buyers and similar help for the 1 million-plus households suffering from negative equity, possibly confined to those seeking to move home.

t Help focused on pensioners with savings of pounds 8,000 or more who deeply resent being cut off from the range of social security benefits extended to those without savings. A strong option already being examined by the Downing Street policy unit is an enhancement of the "granny bond" measure that was announced by Mr Clarke in his 1993 Budget.

t Relief on the national insurance or corporation tax payments incurred by more than 2 million small businesses.

t An increase, which would mark a U-turn, on the married couple's allowance which has been - like Miras - progressively reduced to 15 per cent from 25 per cent since April 1993.

Ministers expect the public-spending Cabinet meeting at the end of this month to reaffirm last year's projected control total of pounds 263bn for the 1996-97 round. But an influential group of MPs, including John Townend, chairman of the backbench Tory finance committee, have already argued that further cuts could be achieved by reducing Whitehall's administrative overheads - including consultancies as well as staff numbers.

Although some ministers would like to see a direct cut in the standard rate, not least because it would pose a dilemma for Labour on whether to pledge not to reverse it, others are sensitive to the argument that the public would be distrustful of anything which looked like a tax bribe after two years of tax increases.

Instead, it is argued, Mr Clarke could defend a targeted package of between pounds 1bn and pounds 2bn by making it clear that he was deliberately setting out to treat as a priority those who have suffered most in the wake of the recession, leaving room for cuts in the standard rate in the 1996 Budget.

Mr Clarke and senior Treasury officials have been strongly sceptical about "quick fixes" to help the housing market, but momentum in favour of measures to help homeowners has increased with the disclosure that the Downing Street policy unit is carefully examining such proposals.

Politics, page 10