Cameron's tax pledge leaves £7bn hole in public finances

Conservative leader vows to halt Darling's planned National Insurance increase

David Cameron will make a firm general election pledge to halt next year's planned rise in National Insurance contributions (NICs) for workers and companies, senior Conservative party sources predicted yesterday.

The move could be the centrepiece of the Tory manifesto. But it would deprive an incoming Cameron government of about £7bn a year of revenue and, to have a credible platform, the party would have to spell out how that would be found.

Mr Cameron and the shadow Chancellor George Osborne have said that halting the 1 per cent increase in NICs is their top priority but have said they cannot guarantee to do so. It is due to take effect in April 2011.

Conservative insiders said yesterday that following Wednesday's Budget, the party leadership appeared increasingly confident of being able to make such a pledge. Various options for how to pay for it are said to be under consideration.

Officially, the party insisted that no decision had been made. "We are straining every sinew to do it – but we are not there yet," said one source.

Labour would seize on a pledge to repeal the NICs rise as evidence that a Tory government would mean swingeing cuts. However, its attack may be undermined after Alistair Darling admitted last night that a re-elected Labour administration would have to make "tougher and deeper" cuts than Margaret Thatcher did during the 1980s.

The Chancellor told the BBC: "They will be deeper and tougher – where we make the precise comparison I think is secondary to the fact that it is an acknowledgement that these reductions will be tough." He added: "There may be things that we don't do, that we cut in the future. We will have to decide what precisely we can do within the envelope [spending total] I set. What is non-negotiable is that borrowing is coming down by half over a four-year period."

The Institute for Fiscal Studies (IFS) think-tank has said that total public spending increased by an average of 1.1 per cent a year in real terms during the Thatcher era, at a time when inflation was higher than it is today. That is almost three times the increase in spending of 0.4 per cent a year that Mr Darling has pencilled in for the next parliament.

Mr Osborne said: "Labour has been found out. Gordon Brown is basing his election campaign on the claim that Labour can go on spending. That is completely blown apart by Alistair Darling's admission, under pressure, that Labour's own Budget numbers imply deep cuts. But why didn't he admit that yesterday? Twenty-four hours on, this empty Budget has completely unravelled and Labour's failure to act will hit families hard."

Earlier the shadow Chancellor said that the Conservatives wanted a "mandate" from the voters for the action needed to cut the deficit and promised to spell out more details before the election. The Tories claim to have identified £7bn of savings but the IFS has estimated that the party's proposals might save only about £1bn. There is an intense debate in the Tory high command about what the party should promise before the election. It has been heightened by the Conservatives' slip in the opinion polls, most of which now point to a hung parliament.

Tory sources report a growing consensus for a bold strategy which, despite the £167bn public deficit, would highlight the Tories' tax-cutting credentials. As well as reversing the proposed rise in NICs, the Tory manifesto will include plans to reward marriage in the tax system and to raise the threshold for inheritance tax from £325,000 to £1m.

A pledge on NICs is seen as central to boosting Tory fortunes. Party strategists hope it would have a similar impact to Mr Osborne's announcement of the inheritance tax cut in 2007, which helped to deter Gordon Brown from calling an election that autumn.

Halting the NICs increase would be popular with Conservative candidates, some of whom have been clamouring for a sharper message to sell on the doorsteps.

Senior Tories believe the move would undermine Labour's attempts to portray the party as a "party of the rich" as the proposed rise would hit people earning £20,000 a year and above. It would also be paid by employers and has been attacked as a "tax on jobs".

A report this week by Policy Exchange, an influential centre-right think-tank, said that raising employers' NICs "appears to be one of the most damaging ways to raise revenue" and the Treasury should think again. It said NICs had risen from 16.3 per cent of total receipts in 2002-03 to 18.3 per cent in 2007-08.

Lord Mandelson, the Business Secretary, last night branded Mr Osborne "the shallow chancellor" as he challenged the Conservatives to spell out their plans. He said: "To govern is to choose. And if the Tories want the public to choose them, they need to say how they would govern. David Cameron has no manifesto and no mandate. If he doesn't like what we are doing, quite simply, what on tax and spending would he do instead?"

An Ipsos Mori survey for Thomson Reuters suggested that Labour is ahead in key marginal seats. The poll was taken in 56 Labour-held seats that the Tories need a swing of between 5 and 9 per cent to win. At the 2005 election, Labour polled 45 per cent to the Tories' 31 per cent. This week, among those certain to vote, Labour was on 41 per cent and the Tories 37 per cent.

Taxes cut: What Tories will do

*National insurance

To halt 1 per cent rise in NICs for employees and employers due to take effect in April 2011.

Cost: about £7bn a year.

*Inheritance tax

To raise the threshold from £325,000 to £1m (and £2m for couples). Funded by £25,000 levy on people non-domiciled for tax purposes. Would be implemented by end of next parliament.

Cost: about £1.5bn a year

*Council tax

To freeze bills for two years. If local authorities propose a rise of no more than 2.5 per cent, central government would provide money to allow freeze.

Cost: £500m in 2010-11 financial year and £1bn a year afterwards.

*Corporation tax

To reduce corporation tax paid by business. Headline rate would be cut from 28 to 25 per cent and the small companies' rate from 22 to 20 per cent.

Cost: rising to £3bn a year, met from abolishing some tax reliefs and allowances for firms.

*Marriage

To reward marriage in the tax system. May not be introduced immediately after general election.

Cost: unclear. Fully transferable tax allowances would cost £4.9bn but restricting the move to married couples with children up to the age of three would limit the bill to £600m.

Not Today: Darling dodges interview

*It has become a tradition that the Chancellor appears on Radio 4's Today programme on the morning after his Budget to explain its finer points.

But Alistair Darling was nowhere to be heard on the station's flagship news programme yesterday, apparently after Today tried to get him to go head-to-head with shadow Chancellor George Osborne.

Presenter Evan Davis, left, told listeners: "We'd hoped to bring the Chancellor to you this morning but we haven't got him. He didn't want to debate with George Osborne."

The Treasury suspected the BBC was trying to pre-empt Channel 4 – which stages a live three-way debate next week between Mr Darling, Mr Osborne and the Liberal Democrats' Vince Cable – and so vetoed the Chancellor's 8.10am appearance.

The programme's makers relented and invited the Chancellor into the studio for a solo interview at 7.30am instead.

But it was too late. Mr Darling had already been booked by BBC Breakfast. As a result Mr Osborne was interviewed on his own at 8.10am. The Chancellor was interviewed by GMTV, Sky News, BBC Breakfast, Sky Radio, LBC, 5 Live, Talksport, 5 News, PA TV, Reuters, Bloomberg, ITV and Channel 4 News yesterday morning. In fact, everywhere apart from Radio 4.

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