'Wise men' counsel caution over tax rises: Chancellor warned that economic recovery is fragile but upbeat Major tells MPs it has taken root

KENNETH CLARKE was warned yesterday that any tax increases in the Budget should be 'modest' and accompanied by an interest rate cut to safeguard economic recovery.

The 'seven wise men' who give independent economic advice to the Chancellor counselled caution, saying: 'We cannot be sure that enough has yet been done to make the fiscal position sustainable. But at the same time we do not want to endanger what may prove to be a fragile recovery.'

But John Major declared yesterday there was 'unmistakeable evidence' that the recovery had 'taken root', in an upbeat message on the economy which still leaves room for tax increases in the Budget.

The Prime Minister said that 'we need to cope with the fiscal deficit and we have the courage to do so'. His remarks in the Commons came after a large majority of the Cabinet appeared willing yesterday to leave the Chancellor the freedom to impose further tax increases as he sees fit.

Three of the City and academic economists who form the team of advisers made it clear they would cut interest rates even if taxes were not raised in the Budget.

The seven argued that tax increases or spending cuts worth about pounds 6bn - 1 per cent of national output - would be enough to provide 'a reasonable degree of assurance that the public finances were on a sustainable footing' if they were imposed in 1995/96 and beyond. This would come on top of the increases announced by Norman Lamont in March, which raise pounds 10bn after two years.

The seven said that extra tax increases might turn out to have been unnecessary, but that it was easier to cut taxes late in a parliament than raise them.

They added that tax increases should aim to enlarge the base of incomes, profits and spending on which they are levied, rather than raise the rates. This suggests support for extending value-added tax and scaling down mortgage tax relief rather than raising the rates of VAT or income tax.

The call for a cut in interest rates was strongly reinforced by Tory MPs at a meeting last night of the backbench finance committee with the Chancellor.

The committee gave its backing to Mr Clarke for VAT increases, if necessary. Some supported VAT on newspapers, but others warned it would look like the Government taking 'revenge' on the press for attacks on Mr Major. There was no support for VAT on children's clothes and food. Some MPs warned that VAT on transport, such as rail fares, would be 'suicide'. In an apparent reference to the protests by senior MPs over further proposed defence cuts, Mr Clarke repeated that he expected the support of MPs for tough spending cuts.

Sir Nicholas Bonsor, chairman of the Defence Select Committee, told the Commons yesterday that the Government should 'spread the pain among departments' and indicated support for some additional tax increases.

Michael Heseltine, President of the Board of Trade, admitted on Channel 4 News last night that the recovery was 'patchy' but added: 'We are now seeing a growth in the economy.' Mr Clarke told the National Housing and Town Planning Council in Brighton that there were 'increasing signs that the recession in the housing market may be behind us.'

A joint study by the Institute for Fiscal Studies and the City firm Goldman Sachs warned that the burden of tightening fiscal policy would fall largely on taxes. 'The public spending targets for years beyond 1994/95 are already so low as to make it unlikely that they will be achieved', the study concluded.

The wise men said that on average they expected the economy to grow by 1.7 per cent this year - in line with the Treasury's estimate - and by 2.7 per cent next year. But they do not expect unemployment to fall very far for the rest of the year, with an unspectacular reduction following next year.