Political Commentary: A tax nettle to sting the Chancellor

THE ANNUAL pre-Budget get- together of Treasury officials and ministers at the handsome Kent country house of Chevening is a curious business. Arch tales of after-dinner snooker, charades, and even madrigals, abound. Nigel Lawson enjoyed them but could never understand why wives went too, unless it was merely so that the spouses of civil servants could see, as he puts it in his memoirs, 'the nature of the strange creatures their husbands were obliged to work for'. The one before the 1987 Budget was the easiest and happiest he could remember, 'marred only by Rosemary (Lamont) slipping on the ice and breaking her wrist'.

The chances are that at the Chevening meeting which ended yesterday the participants saw less of their wives than usual. The argument, it is safe to assume, was fierce and protracted: to raise taxes to curb the deficit as Lords Howe and Ridley urged last week; or to delay action until the recovery is fully under way, as Mr Major is widely believed to prefer.

All the options will have been raised, of course. And none of them are easy. The change of prime minister has removed the biggest single obstacle to the eventual phasing out of mortgage interest tax relief, which costs pounds 5.2bn a year. And there is some cautious talk about it in Whitehall. But given the state of the housing market, any measure would be long-term, would only hit first-time buyers, and then only after they had been borrowing for some years. Taxing of some of those benefits that are not means-tested is another possibility. It has begun to emerge that cuts in invalidity benefit were considered until a late stage of the last spending round but were vetoed by Mr Major. Tax allowances could be frozen as they were by Sir Geoffrey Howe in 1981, but an actual increase in direct taxes is generally judged within the Tory party to be politically suicidal. George Bush's departure from the White House in 10 days' time is a dire reminder of the nemesis which overtakes conservative politicians who fail to honour their tax promises.

Increasing VAT rates is scarcely less difficult. Mr Major shocked the Treasury well before the general election by the emphatic way in which he ruled out an increase in VAT rates - going, probably further than he had meant to, beyond the time-honoured and hollow formula that he had 'no plans' to increase VAT. So while the option of a higher rate will certainly have been discussed at Chevening, the conventional wisdom in Whitehall has been up to now that it would be politically very difficult, perhaps a U-turn too far, to increase the current 17.5 per cent rate. This leaves the sturdy standby of Chevening meetings: the extension of VAT to goods which are exempt.

In total, these exemptions are worth pounds 11bn but they include some basics such as domestic fuel and power and food. To levy VAT on food would put a disproportionately severe burden on the poor. Two of the items most commonly discussed are children's clothes and newspapers. It would be a brave government which decided to put VAT on children's clothes - though Mr Lawson tried to persuade Margaret Thatcher to do so in 1985. Few people now remember that Robert Maclennan once led a party (the SDP) with a programme which included VAT on children's clothes that helped to consign him to political oblivion. But economic purists dislike the exemption; and it is not unknown for Cabinet ministers to complain in private that women with small feet can escape paying VAT on shoes because they take children's sizes.

Ending the exemption for newspapers and books would bring in pounds 1bn if they were made liable for VAT at 17.5 per cent. It was not known until the publication of Lord Lawson's memoirs that he very nearly did impose VAT on newspapers in his 1984 Budget and has ever since regarded it as a mistake not to have done so. He was talked out of it by Mrs Thatcher, who urged him not to risk spoiling a good reception for his first Budget by provoking Fleet Street. (Mr Lawson's reasons were high-minded and entirely fiscal; but serendipitously the proposal coincided with the worst Budget leak to a newspaper since the 1940s - a leak so comprehensive that the Queen had to devote much of her pre-Budget audience with Mr Lawson to cheering him up about it.)

It is an intriguing issue because Mr Major continues to brood about the press and its perfidy in the latter half of last year. Both he and Mr Lamont must be tempted, especially since it was Mr Lawson's conclusion that you could probably only afford to put VAT on newspapers in the first year after an election.

Much current Whitehall wisdom has it that little or any of this will happen in March and that tax increases of any kind will wait until December, when under the new system, devised by Mr Lamont, of announcing tax and spending plans at the same time, there will be a second Budget. It is a safe bet that final decisions will not be made for several weeks and a good deal depends on how visible are the signs of recovery when the Budget speech is drafted. And Mr Lamont will certainly have come under pressure yesterday from his own officials to raise taxes sooner rather than later. The reasons for the prevailing view that these officials will not get their way are illuminating.

They lie in the relationship between the Prime Minister and his Chancellor. A Chancellor's ability to withstand prime ministerial pressure should not be underestimated. Lord Lawson remarks in his memoirs that while he could not introduce in his Budget measures to which Mrs Thatcher was adamantly opposed, she for her part was unable to dictate to him. The Prime Minister is the first Lord of the Treasury, as Mrs Thatcher never tired of pointing out. But part of the Chancellor's protection is that he can hardly be sacked for being too prudent.

If, as is almost certain, Mr Major is anxious not to raise taxes too early because it could choke recovery before it is under way, it would not, normally follow that he would have it all his own way. But these are not normal times; Mr Lamont has been weakened principally by the collapse of the exchange rate mechanism and the public doubts about his gravitas, notably in the use of public money to pay his legal fees in evicting an unsavoury tenant from his private property. The paradoxical silver lining of Mr Major's annus horribilis is that it has left the Prime Minister in a stronger position, for the time being, to direct economic policy. That was evident in his seizing the initiative on growth after Black Wednesday. And it will be evident in his 'hands-on' approach to the Budget.

We must doubt, finally, that Mr Lamont will dare to introduce large tax increases in the March budget. It would certainly be unpopular, and he is somewhat short of political credit points at present. There are senior politicians who believe Mr Major might not reshuffle his Cabinet until 1994 - not least because of the political dangers of transferring senior figures, including Mr Lamont, to the backbenches - and that Mr Lamont will therefore have one, and possibly two more Budgets still to produce. If so, the chances are that he will have to grasp the tax nettle by the end of this year at the latest. The alternative would be a reshuffle this summer, propelling Kenneth Clarke, the Home Secretary, into the Treasury. Just the man, perhaps, to raise some taxes and get away with it. Come to think of it, he might even be macho enough to succeed where Mr Lawson failed in 1984, and put VAT on newspapers.