Clarke risks cabinet rift with plan to raise taxes: Quick reduction of election year's projected pounds 30bn deficit will permit Conservatives to offer poll 'sweeteners'

KENNETH CLARKE yesterday risked causing a rift in the Cabinet and a Conservative backbench rebellion by threatening to raise taxes to provide the Tories with a general election war chest.

The Chancellor has rejected the plans for reducing debt inherited from Norman Lamont, his predecessor. The Prime Minister's office confirmed his aim is to cut the projected deficit of pounds 30bn in election year, 1997-98, which will provide room for pre-election 'sweeteners'.

Mr Clarke made it clear in interviews that he intended to accelerate the reduction of the public sector deficit and raise taxes, if higher-than-expected growth fails to bridge the gap between revenue and expenditure in his first Budget in November.

Right-wing Tory MPs warned that the party would find that unacceptable, and Cabinet colleagues opposed to tax increases are certain to be alarmed.

Mr Clarke said: 'If we get into a situation where this public spending deficit is not going to come down, it is my duty as a prudent Chancellor to look for revenue. My duty as a Chancellor is to say there are occasions when you do have to put up taxes. There are occasions when you can reduce it, but at the moment, my priority has got to be to get this deficit out of the way.'

The Chancellor is studying plans for raising national insurance contributions and corporation tax and widening the value-added tax base to zero-rated items, such as public transport and water bills, which would be unpopular.

John Redwood, the newly appointed Secretary of State for Wales, has tried to rule out income tax increases. Other ministers known to have reservations are Michael Howard, the Home Secretary, and Peter Lilley, Secretary of State for Social Security. A split over tax increases would damage the Government, but Mr Clarke believes he can count on the support of the majority of the Cabinet, led by Michael Heseltine, President of the Board of Trade.

It could test John Major, who vetoed tax plans by Mr Lamont, and the Chancellor's Thatcherite Treasury colleague, Michael Portillo, in charge of cutting spending.

The Chancellor is prepared to call the bluff of the Tory rebels, because they would not be prepared to vote out tax increases and bring the Government down. Downing Street ruled out Tory right-wing demands for deeper cuts in public expenditure. Officials said the Cabinet would stick to the ceiling of pounds 253.6bn for next year, which would be 'tighter than they think'.

There would be 'tremendous problems for the party' if Mr Clarke proposed tax increases, said David Shaw, vice-chairman of the Tory backbench finance committee. 'I believe the majority of the party - if not the very, very substantial majority of the party - wants to see no more increase in tax,' he added.

The Chancellor, who earlier warned that the Government was in a 'hole', brushed aside the backbench criticism over Mr Major's 'lack of grip' and said on BBC: 'I think the hole is getting shallower. John Major in the House of Commons and at Copenhagen is actually raising the morale of his supporters.'

Tory business managers are determined to rebuild backbench morale, after a bruising week culminating in the resignation of Michael Mates from the Northern Ireland office, by concentrating next week in the Commons on law and order. The Home Secretary will publish the White Paper for reforming the structure of the police force on Monday and on Wednesday will publish plans for shaking up the police with performance-related pay.

Mr Major yesterday appointed a loyal supporter, Sir John Wheeler, to replace Mr Mates. As a backbencher, for 14 years, his promotion avoids any further ministerial moves. Touring his constituency, Mr Major tried to draw a line under the Mates affair and the continued controversy over party funding. 'It's finished,' he said.

However, the Prime Minister's office made it clear that Mr Major was vexed by the press coverage yesterday, with allegations that his reluctance to sack Mr Mates was a sign of weakness. 'You never said he had a good session of Prime Minister's questions. He accepts the resignation and he is still criticised. . . . Whatever he does, you criticise,' said a government source.

Last night Douglas Hurd, the Foreign Secretary, spoke of the Conservatives' miserable year with 'a lot of misfortunes and some mistakes'. But he told BBC Radio 4's The World Tonight that 'realities are now coming right and beginning to prevail'.

He admitted the economic recovery was fragile - 'because many of our best markets are heading into recession'. 'That is why Kenneth Clarke, the Chancellor, is very cautious about how he defines recovery.'