Air-traffic sell-off put back on track to raise tax cuts

Privatisation of air-traffic control has been put back on the agenda by the Government as part of the Treasury's attempts to raise finance to pay for tax cuts in the Budget.

The plan was dropped when it was proposed a year ago but Sir George Young, the Transport Secretary, is willing to follow the US in privatising the service and has dismissed fears about safety implications.

It would require legislation and could not be done before the election but is part of a list of privatisations, including the Royal Mail and London Underground, being studied for after the election.

Cabinet sources said a battle is looming over public-spending cuts of up to pounds 5bn to allow some tax cuts to go ahead. "It will be very tight. There will be blood on the floor," said one minister. The Chancellor, Kenneth Clarke, who will chair the EDX committee of the Cabinet this week, damped hopes of tax cuts in his conference speech last week but ministers still expect some reductions. He will review the scope for cuts with his Treasury team on Friday at Dorney Wood, the chancellor's grace-and-favour residence.

Another source said: "None of the spending bids have been settled yet." The main targets are the roads programme, defence, social security, and prison-building.

Michael Portillo, the Defence Secretary, said on the Jonathan Dimbleby programme yesterday that he hoped the Chancellor would still have room to make cuts if it was prudent to do so. He is ready to sell the Ministry of Defence building in Whitehall but is prepared to resist more cuts. The building needs refurbishing and will be sold to a private-sector bidder with a lease-back arrangement to the Government to pay for the work.

This is planned for the Treasury building across Whitehall, where the private owner will be allowed to keep most of the property for use as offices or a possible hotel. The MOD building, which has a communications bunker, cannot be broken up for security reasons.

Mr Portillo blames the Treasury for failing to recognise the sensitivity of the armed forces over the sale of their married quarters, which caused a row in the summer. That will raise pounds 1.6bn, with pounds 100m being ploughed back into refurbishment of the homes.

He will argue that his defence budget has made a big contribution to tax cuts, and cannot be squeezed any more.

But the Treasury can point out that he has had the go-ahead, against Mr Clarke's wishes, for some big defence orders, with the Nimrod reconnaissance aircraft, and two new missiles for the RAF, including a "tank-buster" whose role is being questioned.

More cuts would outrage Tory MPs. Keith Mans, chairman of the Tory backbench defence committee, says in the current issue of the House Magazine: "The stability that the services now require should mean, in my view, no more defence cuts ..." MPs will be debating defence for the next two days in the Commons.

Public-sector pay is being squeezed tightly by the Chancellor, who has written to all pay-review bodies, insisting on a freeze unless rises can be paid for out of productivity. All departments have been told to cut running costs by 12 per cent over the next three years.