Tension mounts as Blair rebuffs Brown over euro referendum

Tony Blair rebuffed Gordon Brown over the single currency yesterday after the Chancellor of the Exchequer warned he would not be rushed into an early referendum.

A day after Mr Brown adopted a cautious stance on the euro in his speech to the annual conference of the Confederation of British Industry (CBI), the Prime Minister told the CBI the Government's policy had not changed and struck a more positive note.

Behind the scenes, there is growing tension over policy on the euro. Although Number 10 approved Mr Brown's speech, Mr Blair's aides are irritated at the sceptical "spin" added to it by the Brown camp.

The Chancellor's speech was widely seen as his reply to Mr Blair's address to the Labour conference last month, when he said the Government should have "the courage" to call a referendum if its five economic tests for joining the euro were met.

One cabinet minister said: "It's a game of ping-pong between Tony and Gordon. But it's a dangerous game; they are both upping the stakes. Tony used to blame the newspapers for over-interpreting their speeches; this time, he knows where the spin is coming from."

Yesterday Mr Blair told the CBI: "Despite whatever you read – warming up or cooling down – the policy on the euro has not altered an iota." He reiterated that the Government would make the case to the British people in a referendum providing the five tests were met. "The benefits in terms of stability, trade and investment are plain to see," he added.

John Monks, the TUC general secretary, accused the Government of "blowing hot and cold" on the single currency. "There is no sense of urgency," he said, adding that was "not a leadership strategy".

Both Mr Blair and Mr Brown prepared the ground yesterday for an increase in taxes to allow Labour to inject more money into health and education. The Chancellor called for a debate on whether taxes should rise and said such a course would be considered when he drew up "future Budgets". His comments were part of a campaign by the Government to prepare the ground for tax rises before the next general election.

Mr Brown said Labour would stick to its pledge at this year's general election not to increase the basic or higher rate of tax.

However, there is growing speculation in government circles that he will raise national insurance payments.

The Institute for Fiscal Studies has calculated that the Government will have a £5bn a year shortfall by the 2003-04 financial year if it wants to maintain the above-inflation increases in health and education spending. It believes that Mr Brown will also need to find an extra £3.8bn to fund new tax credits for children, low-paid workers and pensioners. However, the Chancellor insisted taxes would not have to rise to meet the costs of the war on terrorism, saying he had built "room for manoeuvre" into the Government's spending plans.

Mr Blair's promise in his CBI speech to "keep taxes as low as possible" fell short of his previous pledges to cut taxes. "Long-term investment must come before short-term tax cuts," he said.