Chancellor plays straight bat on taxes: Kenneth Clarke tells Donald Macintyre, Political Editor, of his goals as he looks for the 'right decisions' to give Britain long-term economic growth

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IT IS all still in place. The infectious laugh, the cigar - a little bigger perhaps than it used to be - and the engaging tease at his own expense. Kenneth Clarke's famous remark, for example, that the Conservative Party would stick to manifesto promises but not necessarily to speeches made on a 'wet night in Dudley' has, he says, 'gone down very badly in Dudley'.

Something has changed, however, though it probably has more to do with the office than the man. This most famously candid of politicians now measures his words just a little more carefully. He plays, in the classic manner of Chancellors, a straight bat on when taxes might start to come down, and on what will happen next to interest rates.

Yes, he says, he has 'heard the rumours' that he initially disagreed with Eddie George, Governor of the Bank of England, over the last cut in interest rates - which is as near as he will come to confirming that the Bank resisted a cut and they ended up compromising about 0.25 per cent.

Despite this, he insists, he is already thinking of other ways of extending the arm's-length relationship with the Bank, which already publishes its inflation forecasts unfettered by the old-style Treasury censorship and which now unilaterally fixes the timing, though not the content, of rates. No, he is not ready to share what those ideas are. And on independence of the central bank, he will follow past practice and 'give my candid views when I stop being Chancellor'.

On how that might come about, he makes no effort to disguise that his hat remains in the leadership ring if and when the moment comes at a time of Mr Major's own choosing. But for now, 'sustained support for the leader of the party is an essential part of getting back our popular following'. And getting the party out of what he has called its 'dreadful hole'.

He adds with mild irritation: 'Speculation is always fun, but we have now reached the stage where there are about three or four members of the Cabinet who cannot make a remark about the weather without it being interpreted as a leadership bid.'

Most of all, of course, political recovery is about the economic recovery. About which he is 'more confident now than I was at the time of the Budget, that we are going to have a sustained recovery with low inflation'. On the other hand, he insists he has always been cautious about the way he puts this; but if he makes the 'right decisions' and if British industry remains competitive, 'then we are on to several good years'.

So when we can expect taxes to come down again? 'I think people would be cynical about tax-cutting that appeared to be solely determined by the political timetable . . . I do not propose to cut taxes before we have recovery or before we have healthier public finances. I think the objective of strong, sustained economic growth has to override everything else.'

What if public spending undershot this year as it did last - would he simply use it to reduce borrowing further, or would he consider cutting taxes as soon as this November? He warns: 'It will require several years of tight public spending control in order to hit the very ambitious target I have set for us of getting back to break-even in the medium term.' So is he ruling out November 1994 tax cuts? 'I will do what I did last year which is to refuse to speculate about what I might and might not do in November . . . I might take people by surprise again.'

Last week, Mr Clarke took a broad swing at excessive salaries at the top of industry. But that does not mean he is thinking about increasing the top rate of tax. The man earning pounds 35,000, he explains, is also on the top rate of tax. 'I am not going to put up the tax on the pounds 35,000-a-year man because he and I are annoyed about some exceptional chairman of a big company. I remember Nigel Lawson had disorder in the Commons when he announced that in the Budget when he took the top rate of tax down. It was hard won and I do not intend to give it up easily. Low marginal rates of taxation are very important in producing a highly competitive economy.'

Nor is he holding out much early prospect of broadening the VAT base - something he has always favoured, in principle. The Government has just had a major controversy, he points out, over VAT on fuel, rescued by his compensation package. 'I think if we were starting again we would have a much broader base with VAT, but all Budgets start from where we are now and I will make decisions about tax base according to the needs at the time . . . so women with small feet can continue to have VAT-free shoes for the foreseeable future.'

This all sounds very much the programme of a politically and economically prudent Chancellor. Where he perhaps differs from his predecessors is in the role he sees for the Treasury within government. It is not, he insists, just a matter of saying no to 'everything you can turn down'. Control of public spending under the new system devised by Norman Lamont is based on 'choices of priorities'. He is pleased that cuts last year were matched by increases in health and education.

'Since John Major came in we are developing a more collective way of running the Government and that means the Treasury presides over the spending round. But I try to ensure that as a Cabinet we steer the money in ways that match policy . . . I regard the Treasury, the DTI, the Department of Employment, as the three economic departments, and I think the Treasury should have a positive input into what I call supply-side economics. And we should look at the consequences for business and the real economy in the changes we make.'

That sounds fine in theory. But has the Government not failed the first big test of that - the initiative for injecting private finance into public sector infrastructure?

No, insists the Chancellor. The Government's opponents are complaining, only four months after he set up a panel to take the private finance drive forward, 'that we have not got any new railway lines yet'.

'By the end of this Parliament we will have a different way of investing in infrastructure in this country with much greater use of private sector capital rather than the taxpayers' money.' Today he launches the British paper for the G7 jobs summit in Detroit, convened by President Clinton - an opportunity to reinforce Britian's case within Europe for a deregulated labour market. 'We need to set an agenda for growth of an employment-creating kind. That means you do have free-market economics, low inflation, healthy public finances without big government debts. It means creating a climate for enterprise and risk investment, encouraging small and medium-sized businesses. You have to deregulate . . . which means getting rid of outdated laws on trades union recognition, restricting workers' hours, paternity leave and minimum wages - all the clutter that is on the European statute book.' And you need, he says, to get education up to standard.

On Europe, he denied any Cabinet split. 'The thing is, we are in favour of it; we are in favour of a free-market, open trading Europe . . . We are against protectionism, over-centralisation, over-regulation. If only people would look at how that separates us from the Labour and the Liberal parties.'

He said the politicians would be 'foolish' if they ignored the fact a gap had opened up between European politicians and public. Conservative MPs would find it easy to agree on a policy opposing centralisation and over-regulation. 'Today's argument is what sort of European Union it is going to be. I want to see British Conservatives . . . arguing with considerable ferocity for the kind of union we want.'

He has already all but ruled out a return to ERM in this Parliament. What about this century? The argument over the ERM, he says, would only come back after achieving a reasonable level of economic convergence. 'We have all got to have achieved low inflation, healthy public finances and sustainable economic growth. When the big players are all in that same position, we will find that the markets will give us reasonably stable exchange rates, which I still regard as a very desirable objective.

'Only then is it worth talking about whether you need any system to reinforce the markets to give you that stability of exchange rate.'

(Photograph omitted)