Tony Blair has already hinted at further reductions in tax on top of the cut in the basic rate from 23p to 22p, which takes effect next April.
The Government may have a pounds 10bn "war chest" because the economy is growing faster than expected. Mr Blair hopes to promise tax cuts and year-on- year increases in health and education spending in the Labour manifesto. But Mr Hague will undercut Labour's tax pledges by allocating the bulk of surplus cash to reducing the tax burden instead of boosting public spending. He is convinced this will be more popular than Labour's proposals, and does not believe the Tory plan would harm services because it would mean only curbing the spending growth planned by Labour.
"If Labour puts pounds 7bn into extra spending and pounds 3bn into tax cuts, we could put pounds 5bn into each," a senior Tory source said yesterday. "Whatever Labour does, we are sure this is an argument we will win."
The Tory leader plans to concentrate his tax cuts on middle-income earners paying the 40p top rate, which bites on taxable income of pounds 28,000 a year, a salary of about pounds 32,000.
Although Mr Hague has not ruled out cutting the 40p rate, he is expected to promise a big rise in the threshold, so many of the 2.3 million top- rate taxpayers will pay only the basic rate. Among those likely to be better off would be the 26,000 headteachers and deputies and 9,100 policemen. "These people are not on fat cat salaries," said a Tory official. "They are in Middle England, and they are in important, professional jobs, often in the public sector."
Mr Hague will discuss his plans to put taxation at the top of the political agenda when his Shadow Cabinet holds a two-day strategy session in Aylesbury, starting tomorrow. They will discuss the first fruits of a wide-ranging review of Tory policy, headed by Mr Hague, to be unveiled at next month's annual conference in Blackpool.
Mr Hague wants to ensure the Tories develop clear-cut policies that highlight their differences with Labour in five key areas, and to avoid what one aide called "a scattergun approach with policies coming out of our ears".
The document laying out the ground for the Tory election manifesto will concentrate on taxation, welfare, law and order, the constitution and Europe.
Mr Hague's strategy will worry some cabinet ministers. The Independent revealed a week ago that they are alarmed at the prospect of a "Dutch auction" on tax cuts. They fear further reductions could leave a future Labour government facing a choice between spending cuts and tax rises if the economy deteriorated.
Mr Hague believes Labour is vulnerable to the charge of imposing "stealth taxes" totalling pounds 40bn since the last election in areas other than income tax.
The public could get the right to sue a Tory government if it broke its key election manifesto promises, under plans drawn up by Mr Hague.Reuse content