Reshuffle adds to Tory splits: Hunt's remarks about re-entry into ERM and increasing taxes fuel right-wingers' fears over economic policy

SIGNS THAT that John Major's reshuffle may only have papered over cracks in the Tory party appeared yesterday with conflicting signals over the economy from Cabinet ministers on the left and right.

As anger over the alleged sell-out of the right continued to boil, more problems piled up for Mr Major with embarrassment over ministerial involvement with Asil Nadir, the fugitive tycoon, and rows over race relations and VAT compensation for pensioners.

Alarm bells were ringing on the right of the party as the new Secretary of State for Employment, David Hunt, declined yesterday to rule out tax increases to curb the budget deficit or Britain's re-entry into a reformed exchange rate mechanism.

While Kenneth Clarke, the Chancellor, was keeping his head down, it was left to the new, more right-wing Home Secretary, Michael Howard, to insist that Mr Clarke was a 'tough customer' who had always been hard on public spending.

But a right-wing minister made clear that the mood of his wing of the party - which had been instrumental in John Major winning the leadership - was bitter. 'All these left-wingers in the Cabinet is quite appalling.' The right had suffered 'very badly' in last week's reshuffle, he said - and Mr Howard would find the left-leaning tendency difficult to counteract.

Thoughts that Mr Major may have had of a period of stable reconstruction were further undermined with embarrassments over the association between the Northern Ireland minister of State Michael Mates, and Mr Nadir; Friday's call by the backbench MP Winston Churchill for an end to the 'relentless flow' of immigrants; and the blunder of John Gummer, the new Secretary of State for the Environment, when he said pensioners would be 'more than compensated' for the imposition of VAT on fuel.

Mr Hunt was described by one right-wing backbench grandee as a 'Euro-fanatic who has not given up the dogma' after he confirmed, in a television interiew, his commitment to the principle of managed exchange rates.

'In private industry, however big the company may be, there is a need for stability in exchange rates,' he said on BBC 1's On the Record. 'You don't want a small manufacturer of components to have to worry about exchange rates when selling in the single market to Milan or Stuttgart. Now that's terribly important and at some stage we will have to find the best way of resolving that problem.'

The backbencher said: 'It does show you, doesn't it, that some people never give up.'

Right-wingers will scrutinise each of Mr Clarke's utterances for signs that he may recant from his pre-reshuffle statement which in effect ruled out a return to the ERM in the lifetime of this parliament. The anti- Maastrich MP for Beverley, James Cran, said: 'David Hunt must be under no illusions about the ERM. It's not just that it's got fault-lines. It's simply that it does not work.' The government source warned: 'The party wouldn't wear it.'

Mr Howard sought to reassure his natural supporters by confirming that he would sit on the main economic committees of the Cabinet, implying that the views of the right would not be lost in the wake of the removal of Norman Lamont.

'The concerns expressed about Kenneth Clarke are in no way justified,' he told Radio 4's The World This Weekend. 'He has always been tough on public spending and I am sure he will carry these attitudes through to his new responsbilities.'

Mr Howard appeared less than confident about the Conservatives' prospects of successfully defending the 23,000 majority in the Christchurch by-election, likely on 8 or 15 July. 'We shall be fighting to win it, but we have lost by-elections in the past.'

On that score the lack of confidence may be misplaced. Paddy Ashdown, the Liberal Democrat leader, regards his party's chances of capturing the seat as much lower than at Newbury.

Issues such as VAT on fuel and rail privatisation should favour the Liberal Democrat candidate - expected to be local although the name of Des Wilson, general election campaign director, has been mentioned. But Mr Ashdown believes his party organisation is weaker than that of the

Conservatives.

Labour is likely to be badly squeezed. Peter Mandelson, the Hartlepool MP and former communications director who handled the Newbury campaign, will play no role because of responsbilities on the Finance Bill committee.

With his Home Secretary's hat on, Mr Howard revealed that he had changed his mind over capital punishment for the murder of police officers, and was now opposed, after the Guildford Four and Birmingham Six cases. 'I had always wanted to have a special appeal process for capital cases which I thought would provide a pretty complete safeguard against the possibility of miscarriages of justice. I had to rethink my attitude to that in the light of those cases.'

Ashdown attack, page 5

Leading article; letters, page 17