Major hints at open door on VAT and tax cuts: Chancellor's speech to take tough line on need to reduce borrowing

JOHN MAJOR yesterday appeared to leave the door open to a decision not to put VAT on fuel up to 17.5 per cent when he said that any changes in taxation plans would be announced 'in the usual way at the usual time'.

His Commons answer sent a ripple through Westminster and Whitehall on the eve of the key Mansion House speech today in which Kenneth Clarke, the Chancellor, will take a tough line on the need to reduce borrowing.

Downing Street and the Treasury moved swiftly to reaffirm that there were no plans to change legislation already in place to more than double the rate of VAT on fuel from April next year. The intention to do so was strongly stated in the Chancellor's budget speech last November.

But Mr Major's seemingly equivocal answer to a question from Margaret Beckett, Labour's current leader, is bound to excite expectations that the Chancellor might reverse the plan for a second stage increase if economic conditions allow for it next November. Some ministers are already expected to urge debate on that option - along with other possible tax cuts - when the Cabinet discusses the coming public spending round in two weeks.

The Treasury, however, is thought to remain strongly opposed to any reconsideration of the second VAT increase - which would raise a net pounds 2.3bn in 1995-96 - not least because ministers feel they have already taken much of the political pain associated with the rise. It could also mean dismantling the complex benefits package to compensate the elderly for VAT on fuel.

And the guarded line from Mr Clarke - and the Prime Minister - that taxes will come down only when the country can afford it will be reinforced today by the Chancellor's Mansion House speech. He has made it clear that he is determined to see a strong recovery, reduce inflation and take measures to cut borrowing, including tight controls on public spending.

When Mrs Beckett protested in the Commons that the typical British family would be paying pounds 800 more next year, Mr Major countered by saying: 'If you are so concerned about tax, perhaps you would like to make clear what your own tax proposals are.'

Mrs Beckett replied: 'I can certainly tell you that we will vote against any such increase in VAT. But this is still more evidence of this government's sheer dishonesty that they are talking about tax cuts at a time when the only things in the pipeline are tax increases for every British family.'

Mr Major hit back: 'Day after day you and Labour MPs make promises with no indication of how those promises would be paid for.' The exchanges came amid growing signs that many Tory backbenchers - especially, but not exclusively, on the Tory right - now see an early cut in taxes as essential to rescuing the Government from its current deep unpopularity. One senior Tory member of the Treasury Select Committee said last night that it was a priority to widen the lower 20p band at the next budget. He did not believe the increased VAT fuel rate would be reversed.