Portillo fends off threats from Tory right wing: Budget tax rises to help meet pounds 50bn borrowing deficit remain on agenda

MICHAEL PORTILLO yesterday refused to rule out tax increases in the Budget and repudiated demands by right-wing Conservative MPs for deeper cuts in public expenditure.

The Chief Secretary to the Treasury, in charge of the toughest review of public spending since John Major became Prime Minister, confirmed that the Treasury would raise indirect taxes, such as value-added tax, if necessary to tackle the forecast record pounds 50bn Public Sector Borrowing Requirement.

He said the spending targets agreed by the Cabinet for the next three years were tough, would require painful cuts in growth and would not be deepened. However, he sought to defuse the threat of warfare with the right- wing of the party, who warned that preferring tax increases to public expenditure cuts was not consistent with Conservative thinking.

Mr Portillo told ITN: 'Direct taxes have a very negative effect on incentives and people need to be incentivised if we are going to have recovery. We are going to control public spending and we may have to have some tax increases. We are not going to forget we are the low taxation party.'

That still left unhappy some of his friends in Conservative Way Forward, a Thatcherite group, which called for the Cabinet to resist tax increases and to cut public expenditure further for the coming three years.

Sir George Gardiner, a leading member of the group, said on BBC that further cuts could be made in social security, overseas aid and defence. 'I think every department could find further economies,' Sir George, the Tory MP for Reigate, said.

Mr Portillo, regarded as the champion of the right, urged his right-wing friends not to rock the boat over the Budget in the autumn.

'What they are doing is lobbying in very colourful language to make sure that the Government retains its toughness. We are about to face a very difficult spending round. When we come out with some of the decisions we have made, doubtless many people will say 'We cannot stomach that, you ought to put up taxes'.'

'What the Way Forward is saying is that it is just as difficult to get tax increases through Parliament as spending cuts. That is absolutely true.'

However, Mr Portillo and the Chancellor, Kenneth Clarke, are softening up public opinion for an extension of the VAT base - possibly at a lower rate of 8 per cent - for items such as newspapers, sewerage and public transport, which are zero-rated.

Right-wingers have told ministers that they are not prepared to go to the stake in resisting an extension of VAT, providing the Chancellor and the Chief Secretary wield the axe against the welfare state. Cuts in the growth in the social security budget will include tightening the eligibility rules for invalidity benefit, and possibly cutting unemployment benefit availability from 12 to six months.

There would be a rebellion if Mr Clarke sought to ease his problems by raising the ceiling on National Insurance Contributions (NICs) - a policy proposed by Labour in the election and attacked by the Tories as 'Labour's tax bombshell'.