Spending curb follows tax threat

AN INCREASE in taxation may have been inevitable had ministers not agreed last week to take a tough new line on public spending, according to Cabinet sources.

The disclosure came as Lord Tebbit, the former Conservative Party chairman and ally of Lady Thatcher, attacked government economic policy. In an interview recorded for BBC Radio's The World This Weekend today, he said: 'Not long ago people were laughing at Chancellor Lawson as the 'one club golfer' because he used only interest rates to control the economy.

We now seem to have a Chancellor who is a 'no club' Chancellor in that he has given control of interest rates to the Bundesbank.' He added: 'I suspect the British economy needs rather lower interest rates and we have locked ourselves into a position where the Chancellor has no discretion at all'.

Mr Lamont, who will respond to the Tebbit charges on the same programme, will reaffirm the Government's commitment to the European exchange rate mechanism. He is also likely to emphasise that new arrangements give the Government a unique opportunity to control expenditure.

Last Wednesday the Cabinet agreed to a new method of finalising the public spending round under which ministers had to settle within an agreed total, rather than negotiating individual bids.

A Cabinet source said: 'If the Cabinet hadn't accepted the remit, tax increases would have been something that would have had to have been considered.'

Treasury ministers argue that lower than predicted inflation means departments have in total pounds 2.5bn more than they had anticipated. That, however, still leaves a large gap between the pounds 14bn overbid from ministers this year. The Government is anxious to protect specific manifesto commitments to avoid the charge of betrayal of election promises.

Areas expected to be hit are transport, where the road building programme is seen as vulnerable, and health, where a significant spending increase had also been built in. Defence and social security are seen as more difficult to prune in the short term.