THE GOVERNMENT is considering extra payments to more than 5 million of the country's poorest people who will be hardest hit by the imposition next year of value-added tax on domestic fuel and power bills.
That emerged from ministerial sources as Norman Lamont, the Chancellor, refused to rule out a further extension of VAT.
And in an atmosphere of growing confusion, a damaging Commons row broke out last night after Michael Portillo, Chief Secretary to the Treasury, suggested that poorer people would not suffer too much because of the 'swings and roundabouts'of the Income Support system.
Mr Portillo said they would gain from index-linked benefit upratings that would take account of this week's petrol price rise - even though 'people on low incomes are very low users of road fuel'.
The Chancellor was repeatedly asked by journalists yesterday to rule out further VAT extensions if more tax increases were needed, but Mr Lamont said only: 'I have no other decisions (on VAT) in mind at the moment.' In addition to fuel and power, which will be subject to VAT from April 1994, zero-rated categories include food, transport, prescription drugs, children's clothes, newspapers, magazines and books.
Mr Portillo's argument that inflation-proofing of benefit could suffice was undermined by ministerial colleagues who said the possibility of a supplementary payment was being considered.
Misunderstanding of the government position was illustrated by one loyalist, David Shaw, who confidently told the House that Mr Lamont had promised a benefit uprating to take 'full account' of the VAT increase - something the Chancellor had specifically not done in his Budget speech.
With rumbles of revolt surfacing on the Conservative back benches, Gordon Brown, Labour's shadow Chancellor, last night urged Mr Lamont to pledge full compensation for pensioners and others on Income Support. He said the VAT change could cost the average household pounds 2 a week when the 17.5 per cent VAT rate was reached in two years.
Earlier Mr Lamont said of his Budget: 'I recognise that it poses some difficulties for the poorest, and we shall take some measures to help them. But the overall effect of the Budget over the two-year measures is that the better-off pay most.'
That view was challenged in the Commons by Jeff Rooker, Labour MP for Birmingham Perry Barr, who asked Mr Portillo about the analysis for the Independent, reported yesterday, showing that the Budget could cost the poorest tenth of the population twice as much as the best-off tenth over the next three years.
Although the Commons votes on the Budget next Monday, any Tory backbench revolt is expected to be stalled until the VAT change is considered in the Finance Bill, some time before the summer recess.
Questioned yesterday about any further attack on next year's pounds 50bn deficit, Mr Lamont relaxed the Treasury goal of ultimately balancing the budget. 'I have never ever said the objective is to balance the budget in one year compared with another,' he said. The aim was instead to 'get back towards balance around the peak of the (economic) cycle'.
The Budget Red Book said the Government's objective was to bring the Public Sector Borrowing Requirement 'back towards balance over the medium term'. Yet Mr Lamont's comments appeared to suggest that a sharply shrinking deficit might occur only fleetingly, when economic growth becomes most buoyant.
He did not rule out further curbs on public spending in the next few years. In addition to holding to the three-year ceilings, agreed last July, Mr Lamont implied that spending could be curtailed further in the November Budget - the first to combine tax and spending measures.
On more immediate prospects for the economy, the Chancellor moved to stamp out lingering expectations of a post-Budget fall in base rates. 'The present level of interest rates is fully consistent with recovery. I have stated that absolutely clearly and I have nothing more to say than that.'
The pound edged up by more than one pfennig, to DM2.4125, once it became clear that rates would not be cut in the immediate aftermath of the Budget.
Official figures showed yesterday that high street spending rose to record levels last month. But City economists worried that the retail recovery could be halted if the announcement of tax increases in Tuesday's Budget damages consumer confidence.
Retail sales volumes rose by 0.2 per cent in February after a 2.2 per cent surge in sales the month before, the largest since the rush to beat the VAT increase in the 1991 Budget.
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