Clarke says second rise in VAT will go ahead: Chancellor dampens hopes of immediate tax cuts and opens rift among Tory MPs

KENNETH Clarke yesterday made it clear the second stage of the VAT increase on fuel will go ahead next April, in spite of protests by pensioners, raising an extra pounds 1.5bn in taxation.

The Chancellor took the unprecedented step of anticipating his own autumn Budget by ruling out a U-turn over the decision to raise VAT on fuel from 8 per cent to 17.5 per cent next April.

Mr Clarke said on BBC television's Breakfast with Frost that the Public Sector Borrowing Requirement would be pounds 36bn in November - pounds 2bn less than forecast. The fall in the PSBR means there will be room to halt the VAT increase. It led to a Labour charge that the Prime Minister's weekend promises about tax cuts were hollow.

The Chancellor's decision to resist the continuing public outcry over VAT on fuel - held to be largely responsible for the Tory defeats in the Newbury and Christchurch by-elections - is likely to cause a rift in the Tory Party. One senior Tory backbencher described it as 'suicide' but most Tory MPs appear to believe the damage has been done.

Mr Clarke echoed the Prime Minister on Saturday by holding out the prospect of a return to tax cuts over the long term. Harriet Harman, a shadow Treasury spokeswoman, said: 'People will be astonished when they hear the Chancellor talking about tax cuts because they know they are in the middle of the biggest tax increases in history.'

Mr Clarke, who earlier said halting the VAT rise would be a priority, said he intended to go ahead with the tax increases to reassure the City and avoid the threat of higher interest rates.

Falling borrowing had got to be sustained, he said. Parliament had already approved the VAT increase with measures to ensure that pensioners and everyone on benefit would be compensated.

Mr Clarke confirmed the Government was also seeking to match the appeal of a new Labour leadership by developing policies for increasing employment by expanding 'in-work' benefits to top-up low wages.

David Hunt, the Secretary of State for Employment, will urge the unions to enter a 'partnership for jobs' tomorrow when he becomes the first Cabinet minister to address a TUC conference. Friends of Mr Hunt said he was prepared to use Labour's phrase - 'full employment' - but he will underline the sharp policy differences, such as Labour's commitment to a minimum wage.

Tony Blair accused the Tories of trying to steal Labour's clothes. He said Labour would tackle tax 'scams' - implying higher taxes for the rich.

John Prescott, a leadership challenger, will today call for a commission on full employment. One of his supporters said: 'If the Tories are coming back to the consensus on full employment, Prescott should get the credit - he has been pushing for this for 12 years.'