THE PRIME Minister was warned last night by an influential group of Thatcherite Tory MPs he will face a rebellion if the Chancellor proposes increasing direct taxes to reduce the pounds 50bn public deficit in his Autumn Budget.
After a meeting of the 92 Group of Tory MPs to review the 'state of the party' at Westminster, its chairman, Sir George Gardiner, said: 'Many said it would be utter disaster if we reversed the policy of recent years and went for direct taxation.'
Some of the 55 Tory MPs who attended the meeting were prepared to support increases in indirect taxation, such as VAT. But the message they conveyed to John Major in advance of the public expenditure Cabinet on Thursday was that Kenneth Clarke will face a full-scale revolt if he increases income tax.
There was also a warning for Mr Major. Although there was 'almost unanimous support' for the Prime Minister, some expressed dissent over his leadership.
They insisted that the Chancellor - who will deliver a 'broad-brush' review of the economy in his Mansion House speech to the City tonight -should concentrate on cutting public expenditure to balance the budget.
Some Tory MPs also attacked Sir Norman Fowler, the party chairman, for his outburst against Norman Lamont. Sir George said some Tory MPs had said it was more damaging to the party than the former Chancellor's resignation statement.
The right wing group dismissed suggestions they had swung their support behind Mr Clarke. They gave a clear signal that they intend to bolster Mr Major, to avoid Mr Clarke replacing him as Prime Minister.
Many regarded the cuts in public expenditure as the litmus test for Mr Clarke.
Michael Portillo, the Chief Secretary to the Treasury, who is in charge of the detailed negotiations on spending cuts had informal talks with Mr Clarke last night at Westminster.
Mr Portillo was said to have told Tory backbench colleagues that he did not know where Mr Clarke stood on taxation - the issue which threatens to divide the Cabinet.
The battle over whether taxes should rise is looming, despite assurances by Downing Street that manifesto commitments would not be broken.
Michael Heseltine, President of the Board of Trade, signalled at the weekend that the option of increasing taxes should be left open - a view shared yesterday by Lord Howe, the former Chancellor - when the Cabinet meets on Thursday to approve a pounds 253.6bn spending ceiling for next year.
The Prime Minister's office distanced itself from those remarks by Mr Heseltine that a new Chancellor might have to 'revisit all the options' and some manifesto commitments would have to be sacrificed.
The divisions on tax emerged on the eve of today's meeting between the Prime Minister, Peter Lilley, Secretary of State for Social Security and Michael Portillo, Chief Secretary to the Treasury, to hammer out how much of the welfare budget should be sacrificed in the contest over how the pounds 253.6bn should be shared.