Ministers are anxious because the Tories have failed to gain an improvement in the opinion polls despite the fact that the factors for a recovery are all in place, including interest rates at their lowest level for a generation, inflation at its lowest for half a century, and the housing market starting to take off.
Mr Major is frustrated about the failure of the economic "good news" to convince the electorate. Morale among Tory MPs remains at rock bottom and many admit they expect defeat at the next general election over Labour's campaign message that it is "time for a chang".
The Prime Minister is concerned that economic good news, traditionally seen as a vote winner for governments at the end of their term, may not save the Tories. High on the agenda will be job insecurity, with one in four of the working population having tasted unemployment since the election in 1992.
Ministers are preparing to target the Labour leadership as part of the fight-back, and senior Tory figures have indicated they are ready for a dirty campaign. They are looking for another embarrassing debacle for Labour similar to the Harriet Harman row.
Ministers plan to exploit splits in the Labour Party over Ms Harman. As the Cabinet is meeting, the Parliamentary Labour Party will be debating a call to bring forward the Shadow Cabinet election from November to July, which could lead to Ms Harman being voted out.
Tony Blair could face the dilemma of appointing Ms Harman to his team, and risk a new rift with Labour MPs who are still angry with her, over the decision to send her son to a grammar school.
The key item on the Cabinet agenda will be a strategy for dealing with the appeal of the Labour leader to wavering Tory voters, by insisting Labour has not dropped Socialism, in spite of its repackaging as "new Labour".
The head of the Conservative research department, Danny Finkelstein, who has mapped out the strategy, has taken ministers to task over the way they deal with Mr Blair. When the Labour leader launched his "stakeholder economy", he was attacked for stealing Conservative policy by Michael Portillo, who was in Japan, while Michael Heseltine, the Deputy Prime Minister, said there was a hidden Socialist agenda.
Mr Finkelstein will advise the Cabinet to stop claiming Mr Blair is a closet Conservative. Tory leaders will be told to stress the Labour Party is sticking to Socialist policies. Ministers will be urged to counter attempts by Labour to jettison unpopular policies, such as the abolition of GP fundholding and selection in schools. The campaign will run a Labour scare campaign.
Mr Major will try to raise the Tories' appeal in a speech tomorrow to the Social Market Foundation, outlining his vision for an "opportunity Britain". Mr Blair also plans a speech on Labour's plans for small businesses - traditionally seen as Tory supporters.
Some senior ministers believe the Scott inquiry into the arms-to-Iraq affair blew the Government off course.
The Tories intend to use the spring council meeting in Harrogate as the launch-pad for a fight-back. Cabinet ministers lined up to speak on the first day include Kenneth Clarke, the Chancellor, Mr Heseltine, and Brian Mawhinney, the party chairman. Mr Major will speak on Saturday before flying to Turin for the IGC.
Mr Clarke is digging in his heels against a referendum which his Cabinet colleagues believe may unite the party. Malcolm Rifkind, the Foreign Secretary, yesterday used evidence to the Foreign Affairs Commons select committee to kill speculation the Government could ignore the results of a referendum on a single European currency.Reuse content