Labour to gamble on early euro referendum

Tony Blair is ready to follow his biggest gamble on last week's tax-raising Budget by accelerating moves towards Britain's entry into the euro.

The Chancellor's economic assessment could be brought forward to June ­ a year ahead of the deadline ­ for a referendum possibly before the end of the year or early next spring at the latest.

Senior government sources said Mr Blair was ready to speed the pace towards entry ­ providing it meets the Chancellor's five economic tests ­ to take on the sceptics in the Tory party, and avoid the euro debate becoming entangled in the campaign for the next general election.

"We will force the European debate back up the agenda," said one key government source. "We have got big dividing lines with the Tories on the economy and the strategy for modernising the public services. We are reaching the point where we have to have a debate about Europe."

Mr Blair fuelled speculation that he intends to call a referendum in an eve-of-Budget interview in The Independent, saying people were "less afraid" of the single currency after its successful launch across Europe on 1 January.

"Tony is prepared to look at it in June. If you leave a referendum much later, you get into next year and you have a big question about the timing. You don't want it getting mixed up with the general election," said a senior ministerial source.

No 10 will be accused of bringing the euro debate forward as a smokescreen to counter the hostile reaction by the media and employers to the Budget. Party chairman Charles Clarke yesterday admitted that many might feel they had been misled by Labour's election promises on taxes, and Mr Blair looked rattled at claims that he had betrayed his election pledge.

There were fears the Budget was unravelling after Labour-led councils protested the Chancellor had given them £300m extra for Social Services with one hand but had taken it back with the other in National Insurance Contributions. Leading accountants Ernst & Young estimate the total employers' NICs bill for the public sector will be £700m. The Tories put the figure at £1bn.

Mr Blair and Gordon Brown remain buoyed by polling results showing their strategy of tax increases for higher spending on the public services has public support. Treasury minister Andrew Smith said ex-Chancellor Ken Clarke's support on BBC radio for the NHS as a largely tax-based service exposed splits in the Opposition over its plans to use charges or private insurance to fund healthcare.

Those close to Mr Blair and Mr Brown say their work on the high-risk Budget strategy had brought them closer, reducing the tensions in their relationship that were described as "destructive" by former Secretary of State for Northern Ireland, Mo Mowlam.

Insiders said Mr Blair will bow to Mr Brown's judgement on euro entry, and there is no question of seeking to override his Chancellor's natural caution. "If Gordon says it's not in Britain's interests, it will be off," said a colleague.

The Chancellor will first have to settle a bruising battle over bids for higher spending. Geoff Hoon, the Defence Secretary, is bidding for more than £2bn extra to finance changes to the Armed Forces after 11 September. Estelle Morris, the Secretary of State for Education, wants more to resolve the student fees crisis and tackle "yobs" in the classroom. Health Secretary Alan Milburn is backing the Home Secretary, David Blunkett, to make higher spending on street crime the priority after health expenditure. Mr Blunkett's friends said talk of a feud with the Chancellor had been "overstated", but Mr Blair's backing could be required to settle the row.