Treasury ministers privately ruled out hopes of substantial tax cuts before the next election.
But sources said Kenneth Clarke will give priority to halting the second stage of the VAT increase from 8 per cent to 17.5 per cent if economic recovery produces higher receipts and a lower-than-expected public-sector borrowing requirement.
Mr Clarke damped down speculation of tax cuts last week in his Mansion House speech to settle City fears of inflation. 'If there is room, he would give priority to VAT before any other form of tax,' the source said.
Ministers stressed that a decision to halt the VAT increase would have to be justified by the upturn in the economy. 'It would have to be led by the arithmetic-led. It could not be politically motivated,' a minister said.
Tory MPs are lobbying hard for the increase to be halted. They fear that more than doubling VAT will inflict worse damage on the Government as it attempts to rebuild its appeal.
It would cost the Treasury pounds 1.5bn to forgo the rise. Allan Stewart, a Scottish minister, reported that halting the hike in VAT on fuel was the priority among Tory councillors and candidates in Scotland.
But some Tory MPs doubt if there would be any political bonus. 'We have suffered the pain. It is unlikely we would be praised for halting it now.
'More than anything else, our supporters are saying there have been too many U- turns. It would probably damage us to change tack now,' one Tory right-winger said.
Some ministers believe the tax increases have undermined the credibility of the Tory Party on cutting income tax. 'We have little time to cut taxes now. We would have to do it in November 1996, for a Spring 1997 general election. And there is the risk that we would not be believed. It may be better to forgo tax cuts and show the voters that we are delivering a sustainable economic recovery,' one ministerial source said.
A fierce spending battle will be triggered on Thursday when the Cabinet endorses the spending control total of pounds 263bn for 1995-96. The Treasury is ready to warn Cabinet ministers that it represents a ceiling, which cannot be breached, and they would like to go below it.Reuse content