George Osborne is planning a number of sweeteners in next week's Budget to try to overcome cuts gloom and reverse the coalition's opinion-poll woes ahead of May's local elections.
The Chancellor is committed to using an unexpected surplus in the Treasury coffers to alleviating financial pressure on motorists, while also promising help for pensioners and the low-paid. Extra measures to target the banks and non-doms and raise the stamp duty threshold for first-time buyers are also being considered ahead of the Budget on 23 March.
The coalition will face its biggest test on 5 May when elections are held to councils across England, the Welsh Assembly and the Scottish Parliament. But Mr Osborne will have his work cut out to persuade a sceptical electorate. Just 23 per cent believe the Chancellor is "on my side" in dealing with the economy, according to a ComRes/IoS poll published today.
Almost two-thirds of voters, including half of those who usually vote Lib Dems, say the cuts are unfair as they will hit the poor more than the wealthy. And four out of 10 people say cancelling the planned 1p rise in fuel duty would not be enough to help motorists.
Public net borrowing figures for January showed a surprise surplus of £3.7bn. The latest unemployment figures will be released on Wednesday, and are expected to confirm lower than forecast Jobseeker's Allowance claims. This has created some flexibility in Mr Osborne's plans.
While some of the surplus is expected to be used to pay down the deficit, the Chancellor has a reputation for producing eye-catching policies when the pressure is on. In 2007, he shocked the Tory party conference with a pledge to increase the inheritance tax allowance to £1m, wrong-footing Labour and sparking a series of opinion polls that forced Gordon Brown to abandon plans for a snap autumn election.
The Lib Dems in particular are pushing for the Chancellor to spell out the next stage of the policy to make the first £10,000 of earnings tax-free by 2015. In June, Mr Osborne increased the income tax threshold by £1,000 to £7,475, lifting 880,000 people out of tax altogether and cutting tax for 23 million people by up to £200 a year.
"We expect to see progress on that spelt out in the Budget," said a Lib Dem minister. To reach the £10,000 target, a key Lib Dem policy secured in the coalition agreement, would cost £13bn.
A flat-rate state pension of £140 could also be confirmed in the Budget, ending means-testing and signalling a significant victory for Iain Duncan Smith, the Secretary of State for Work and Pensions.
Additional apprenticeship places are expected to be found and Vince Cable, the Business Secretary, will insist the coalition is on the side of entrepreneurs in a speech to the Federation of Small Businesses, which has set itself against the Government's plan to localise business rates. The Budget will include £100m to boost growth in 10 enterprise zones, while the Office of Tax Simplification will outline reform of the tax system for small businesses, easing administration and reducing uncertainty.
The Chancellor and the Prime Minister last week claimed the Budget would kick-start the economy. Mr Osborne said it would "confront the forces of stagnation that stand in the way of success; bring down the barriers that stop Britain getting back on its feet".
Labour will stage a Commons vote later this week on scrapping the VAT rise on fuel, claiming it has added £1.35 to the cost of filling up a 50-litre tank. And tomorrow, the party's leader, Ed Miliband, will publish research showing how the coalition's tax and benefit changes will be the equivalent for some families to a 5p increase on the basic rate of income tax.