Michael Portillo, Chief Secretary to the Treasury, has told colleagues the Budget will have to be taken as a complete package, and the Tory rebels will not be allowed to pick and choose. 'They will have to accept the Budget as table d'hote. It's not going to be a la carte,' Mr Portillo has said.
Kenneth Clarke, the Chancellor, is preparing to extend VAT to zero- rated items such as newspapers, books, public transport, food and children's clothes, possibly at an intermediate rate of 8 per cent, to reduce the Public Sector Borrowing Requirement. That could be coupled with a U-turn on VAT on fuel charges, which has proved disastrously unpopular in the Christchurch by-election, where the Tories are expected to lose on Thursday.
VAT will be introduced at 8 per cent from next April and Mr Clarke has said there can be no going back on that decision. But he is considering cancelling the move to increase it to the full rate of 17.5 per cent in subsequent years.
The Budget will be the first serious test of the uneasy truce between the Government and the rebels. Many of the rebels on the right of the party who voted against the Government on Maastricht are the same MPs who are demanding cuts in public expenditure, rather than tax increases.
They have been threatening a further rebellion if Mr Clarke chooses to increase taxes. But Mr Portillo and Mr Clarke are gambling that the rebels will not dare take the Government to the brink again, after John Major won the confidence vote.
It is a calculated risk which could plunge the Government into worse trouble in the autumn. The truce over Europe was already cracking over the weekend, with John Major referring to the rebels as 'bastards'.
The rebels are also privately predicting that the truce will break down over the Tory manifesto for the European elections. Lord Tebbit, a leading opponent of the treaty, said on BBC television: 'I know that many ministers, perhaps most, hope that it will never come into effect - but it will.'
The Prime Minister's authority is likely to receive a further blow on Thursday after opinion polls at the weekend pointed to a landslide for the Liberal Democrats in Christchurch, one of the safest Tory seats.
Simon Hughes, a Liberal Democrat MP, said the by-election could halt the increase in VAT on fuel bills as previous by-elections had got rid of Nigel Lawson, Margaret Thatcher, the poll tax and Norman Lamont.
Tony Blair, a member of the Shadow Cabinet, said: 'The most important thing that is now emerging is just the sense of disarray and disunity, the idea that everything now has to be traded off in this battle for the factional in-fighting.'
He said said on the Breakfast with Frost programme that Bill Cash, one of the leading anti-Maastricht Tory rebels, had been asked to put forward ideas for the Tory European election manifesto to keep the party together. 'No matter what type of issue it is . . . it's all become a trade-off between these rival factions. That's not the way to run a country.'
Sir Norman Fowler, the party chairman, said that was 'batty'.
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