Major forced into defence of economy: Prime Minister put on the spot after Clarke forecasts 'check' in recovery

JOHN MAJOR was forced yesterday to reassert government optimism about the economy after Kenneth Clarke, the Chancellor, irritated some Cabinet colleagues by saying that the forthcoming tax rises would 'check' the recovery.

Mr Major said in the Commons that 'the economy is growing stronger daily . . . and it will continue to grow' after John Smith, the Labour leader, seized on the admission to argue that 'tax increases equivalent to 7p on income tax are bound to hit family budgets for six'.

The move came as the Cabinet agreed in an 80-minute session to put economic policy as well as law and order and education at the top of its campaigning agenda in the crucial forthcoming local and European elections. The two most senior Treasury ministers, Kenneth Clarke and Michael Portillo, have already been assigned the job of taking Labour's tax offensive head on in weekend television interviews and newspaper articles.

Mr Clarke, as Mr Major was at pains to stress in his exchanges with Mr Smith, also told the BBC Today programme that Britain was on the way to 'a steady recovery at a sustainable level' and also emphasised that 'the recovery is now strong enough for those tax rises to be taken in their stride'.

But he caused some consternation among Tory MPs when he added: 'It will check it, but it is strong enough for it not to be stopped. It will take a bit of the edge off consumer demand which is much stronger than it was 12 months ago. Obviously if you take more taxation out of people's pockets, they have that much less to spend on consumer goods. On the other hand you must remember how much mortgage rates have come down.'

He estimated that there was pounds 8bn extra going into the economy in interest rate reductions on mortgages. That message will be reinforced by the Chancellor in a weekend television interview, but one interpretation of his note of caution yesterday was that he was keeping open the possible option of an interest rate cut. The Cabinet also appeared to have decided not to extend its counter attack on Labour over 'smears and innuendoes'.

The main purpose of the political meeting was to hear a pep talk from Sir Norman Fowler, the party chairman, in which he asked for - and secured - an assurance that Mr Major would throw more collective effort into the European elections than Mrs Thatcher's Cabinet did during the last ones in 1989.

Mr Major will do 'significantly more' than the two short tours and single press conference his predecessor did during what party sources acknowledge was a lacklustre performance five years ago. Sir Norman was able to give the Cabinet one ray of light after their recent travails by reporting that an efficiency shake-up of Central Office meant the party should break even in the financial year 1993-94.

He told ministers he would be 'disappointed' if it did not make a small surplus in its current account and allow the party to tackle its big pounds 19m accumulated deficit.

It was said that British MEPs were not individual members of the centralist European People's Party grouping and that the Tories would be able to fight the European elections on a 'British conservative', ant-centralist manifesto.

Angela Rumbold, MP for Mitcham and Morden, is to be the new vice-chairman responsible for parliamentary candidates, the first woman to hold the job.