Clarke in row over 1p tax cut

Chancellor Kenneth Clarke is poised to cut income tax by 1p in the pound, according to Treasury sources.

But his move to placate Tory MPs demanding a big tax-cutting Budget next month in the run-up to the general election is causing unease in his own department.

Professor Alan Budd, chief economic adviser to the Treasury, has even threatened to resign if Mr Clarke gives way to right-wing backbenchers, it is claimed.

Political pressure on the Chancellor is building up on the eve of the Conservative Party conference in Bournemouth this week. Treasury sources say he has decided to compromise by reducing the basic rate of tax from 24p to 23p in the pound, at a cost of around pounds 2bn in a full year.

This would be the second year running that he has made a cut of this size, which he could plausibly portray as another step on the Government's promised path to a basic rate of 20p.

It was 33p when the Tories took office in 1979, but the fall in basic rates masks a sharp rise in indirect taxes, which Mr Clarke favours and which would almost certainly rise again in the Budget.

His modest proposal is unlikely to satisfy Tory hardliners such as John Redwood who argues: "If we had another great tax-cutting budget, we will go up in the polls."

But Alastair Darling, Shadow Chief Secretary to the Treasury, said: "John Redwood is simply playing politics with the nation's finances. He sees the Budget entirely as a means of political point-scoring...

"Redwood is fighting not the coming election but the next leadership campaign. It is perfectly obvious that, more and more, the Tories are preparing for life in Opposition."