Tory MPs are ready to support tax increases, particularly in VAT. But John Smith, the Labour leader, said that voters would have been 'massively betrayed' if the Chancellor increased VAT.
Senior colleagues expect Norman Lamont to limit tax rises by signalling to the City a readiness to introduce tough spending cuts in the autumn with the first unified Budget and spending review.
Ministers believe the Chancellor will lower the 1994-95 ceiling for spending agreed last summer. They believe it may be held at the 1993-94 level of about pounds 243.8bn when the Cabinet meets to review spending in June. Spending is due to rise to pounds 253.6bn in 1994-95, real growth of 0.7 per cent. But ministers believe the Treasury has had to revise the growth plans to reduce the pressure for large-scale tax increases in the Budget.
Radical options for cuts are already being considered by four departments - health, education, social security and the Home Office. Health ministers have privately confirmed that the rising NHS drugs bill is the main target and options include reducing the number of patients exempt from the pounds 4.25 prescription charge.
Bilateral talks begin next month on a range of spending cuts, including incentives to take out
private insurance for health care and the basic state pension.
Mr Lamont is expected to present VAT on fuel bills as a 'green tax'. But he may ease VAT on horse bloodstock sales, which could boost the Tories' chances in the by-election at Newbury, a horse racing centre. He will also claw back pounds 750m on the abolition of car tax by increasing tax on motoring.