Rate rises will not mean tax cuts, warns Clarke

KENNETH CLARKE, the Chancellor of the Exchequer, yesterday warned the Conservatives ahead of next week's party conference that he would not use necessary rises in interest rates to justify tax cuts or looser control of public spending.

He told the annual meetings of the International Monetary Fund and the World Bank in Madrid: 'Talk of tax cuts in this November's Budget is hopelessly premature.' Mr Clarke's speech was clearly aimed at a domestic audience - he is determined to defuse the tax issue before his party's activists meet in Bournemouth.

The Chancellor and his advisers have begun writing his party conference speech, which will be delivered next Thursday. Getting into the mood, Mr Clarke took a swing at the shadow Chancellor's speech on Labour's economic policy last week, saying he hoped 'to show Gordon Brown that there is a middle ground between post-classical economic theory on the one hand and meaningless economic rambling on the other'.

Mr Clarke used his speech to the annual meetings to rule out a trade-off between higher interest rates and a loose Budget, reversing the approach taken last year when the tight Budget was used explicitly to justify a pre-Christmas base- rate cut. He said the tax cuts would come back on the agenda 'as the economy strengthens further and as public expenditure is brought firmly under control'.

The pre-released version of the Chancellor's speech said the public sector borrowing requirement was 'set to exceed pounds 30bn this year'. But Mr Clarke used the pounds 36bn figure predicted in the Treasury's summer forecast when he came to deliver the speech so, he said, as not to suggest to the markets that the expected PSBR profile had been cut since then.

The Group of 11 leading financial and industrial countries agreed on Sunday to Mr Clarke's suggestion that they should launch a study into the behaviour of savings and investment at world level. The Chancellor is worried that savings may be inadequate to meet the demand for investment which is pushing up market interest rates around the world.