Value-added tax could be applied to zero-rated goods such as transport, housebuilding and newspapers. The 17.5 per cent VAT rate also could be increased.
It is unlikely Norman Lamont will increase National Insurance contributions, and income tax increases have been ruled out. Raising taxes on spending would avoid breaking election pledges to keep direct taxes down, but could reopen divisions within the Tory party and anger Labour as being a tax on the poor.
Some key right-wing ministers are strongly opposed to tax increases on the grounds that they could depress the economy. But Mr Lamont has told colleagues that in spite of signs that the economy is picking up he must reduce the public sector borrowing requirement. He announced in the Autumn Statement that it would rise to pounds 44bn in 1993-94, the highest level since Britain was driven to apply for loans from the International Monetary Fund in 1976.
Mr Lamont will review the options at Chevening on 9 January.
Kenneth Baker, a former party chairman, said yesterday: 'I think the next Budget will be tough and the party ought to realise that. The blunt fact is we have got to reduce the deficit. I think Norman realises that.
'The party should be prepared for either tax increases or further cuts in public expenditure . . . it will be a very long haul.'
The Government was warned by Lord Prior, a former Secretary of State for Employment, that unemployment was 'unacceptably high' and will still be rising by Christmas 1993.
'I don't believe in the long run it is just, socially or economically, to run an economy or a society with 3 million unemployed,' Lord Prior, chairman of GEC, said on Radio 4's The World at One.
Ministers expect the total to rise to above 3 million early next year, in spite of John Major's shift in economic policy towards trying to promote growth. However, they are less pessimistic than Lord Prior and expect the rise to stabilise before the end of the year.
Ministers do not believe 1993 will herald a revival of the inner city riots which came after the last recession, but are wary of making predictions about social unrest.
Lord Prior, a former 'wet', said Mr Major was following a Keynesian recovery plan.
The Prime Minister is to go on the attack over domestic policy in his new year message, expressing the hope that Britain is poised to come out of recession.
But the warning by Lord Prior, who also saw signs of recovery, underlines the difficulties facing the Prime Minister and Chancellor in reducing borrowing while unemployment is rising.
Lord Prior said unemployment was going to remain very serious but unlike the 1980-81 recession, when he was in charge of employment, the service industry would not provide more jobs.
Unemployment will deepen with the closure of some of the 31 threatened pits, which Michael Heseltine, President of the Board of Trade, will have to announce in the new year.Reuse content