Lamont plea on spending cuts

THE CHANCELLOR yesterday warned Tory backbenchers to prepare for 'exceptionally rigorous' cuts in proposed increases in public expenditure, in an attempt to avoid a serious backlash from the party when the figures are announced in the autumn.

Norman Lamont used his end- of-term letter to all Tory MPs to appeal for their loyalty in cutting the public expenditure borrowing requirement from pounds 28 bn this year. He told the MPs: 'If we have the courage to take difficult decisions today the prospects for this country and for our party are excellent.'

Mr Lamont warned that further progress in the lower 20p band of income tax could be wrecked if public expenditure was not cut.

The Cabinet, which will endorse Treasury demands for cuts when it reviews public expenditure next Thursday, is hoping the Bundesbank will not raise German interest rates today. 'We expect them to delay until after the French referendum on Maastricht in September,' one minister said.

But Mr Lamont also reaffirmed the Government's determination to maintain sterling's position in the Exchange Rate Mechanism. That could include raising British interest rates if German rates were raised, ministers said last night.

The Chancellor rejected devaluation of the pound and said: 'We must not throw away long-term security for the illusory benefits of a quick fix.'

Mr Lamont reminded the MPs that they had fought the election on a manifesto to reduce public spending and on a commitment to low taxation. 'If it was right not to play politics with the economy before the election, it must be right not to do so now. Equally, if we accept that our commitment to cutting income tax helped us to win a fourth term, we must now get to grips with public spending and reducing the PSBR.'

The Prime Minister has intervened to stop the Treasury cutting the European Fighter Aircraft from the defence budget and to halve the 20 cities who will win City Challenge grants today. Ministers believe the failure of the economy to revive, and the threat of German interest rate increases, will make the public expenditure cuts worse than feared.