Singing that old tax-cutting tune

Alan Howarth, Labour's newest MP, is having more of an impact on Budget thinking than he may realise. With the Government's majority now dangerously slim, the balance of risk is turning in favour of a serious bout of tax cutting this year. A few coronaries, an unexpected resignation, and the 1996 pre-election Budget has gone. John Major needs to get money into voters' pockets while he still can.

Nods and winks from people round him suggest that the Prime Minister intends to say something substantial on tax and spending in his speech. But the public spending negotiations, with all the semi-public posturing and propaganda they involve every year, are still in mid-haggle. And Major cannot pre-empt his Chancellor on the details of Budget tax cuts.

His most obvious strategy would be to bind himself to a rolling programme of tax cuts, perhaps taking the basic rate itself down to 20p in three years, and promising a substantial start this autumn. An alternative would be to cut VAT on fuel, as Labour proposes - something which, judging by their applause yesterday, party activists would love.

Major himself is in ebullient private form and an act of tax-cutting conference drama has an obvious appeal. It would give him ecstatic weekend headlines in the Conservative press and, with the party more unitedly Euro-sceptical than it has ever been before, it might tilt the media verdict on the conference as a whole. The move to the right, so evident on Europe, welfare and crime, would be confirmed. The fightback would be declared to have started at Blackpool.

Yet tax cutting now would be genuinely risky, both politically and economically. The markets are already showing signs of slight unease about government finances, and Major needs a cut in interest rates, too, preferably during the winter. He needs credibility at a time when the money men are suspicious about the rigour and principle of late-era Majorism.

One indication of this is a City story which argues that Howard Davies, the new deputy governor of the Bank of England, whose views on executive pay made headlines recently, is Tony Blair's preferred choice as governor. If the incumbent, Eddie George, wants to keep his job, therefore, he needs a Conservative victory. And how, the story mischievously finishes, will that affect his attitude when Kenneth Clarke suggests it is time for a loosening of policy?

It is a good story, made better by the fact that Alan Greenspan at the Federal Reserve Bank in Washington, is also facing a bright, politically aware challenger, the Clinton-appointed Alan Blinder; it gives some idea about how sceptical the markets are, and how nervous of the contamination of policy by politics.

All that said, economists seem relaxed about a Clarke tax cut of anywhere between pounds 2bn and pounds 4bn. Yesterday's "green Budget" from the Institute of Fiscal Studies and Goldman Sachs argued that there was room for pounds 2- pounds 3bn. That might still allow for a half-point off interest rates as well.

The political risks of tax cutting are also interesting. Labour has made some progress in encouraging a feeling of guilt among voters about lower taxes and poorer public services. The Conservatives' own "focus group" research shows that even Tory voters are now feeling a bit ambiguous about the matter.

In the end, though, there is such a broad base of support in the party for that old familiar tax-cutting tune that Major can be expected to sing it loudly on Friday. Though ministers had believed that the main cuts would not come for a year, their mood has changed.

It is not only the danger of an election being forced early. It is also that, if the mood of suspicion among the voters is to be dealt with, the cuts need to be made now and, if possible, repeated in 1996. "It has to be a theme, a pattern, not something that can be painted by Labour as a one-off pre-election gimmick," one minister said.

The gamble may be hedged around with other wheezes, such as the notion of "time-bomb" tax cuts legislated in advance to cause problems for any future Labour government. Major's own Huntingdon constituency party has a motion down for today's economic debate demanding the abolition of inheritance tax, for instance. One MP argues that this could be legislated to occur in, say, 1998.

All of which is fair enough, and much what one would expect from Conservatives with their hackles up. But there is a deeper question here for the Tories and one which only the free spirits outside government have been facing up to. For the truth is that while the party is very good at talking about cutting public spending and reducing the tax burden - consistent, clear, forceful - it is rather bad at getting round to doing it.

The share of national wealth spent by the state has wobbled up and down a little during the Eighties and Nineties, but it has not moved decisively; and today, the Government's declared objective to get it back down below 40 per cent is regarded as optimistic even by some Treasury officials.

Tax cutting has become for the Tories what public spending has long been for Labour. It provokes instant scepticism about where the money is coming from. There is a similar unreality about the issue, a readiness to talk with relish about radical tax targets, combined with a nervous timidity whenever ministers are faced with real proposals for real cuts. This was so even under Margaret Thatcher, and it is certainly the case today.

When John Redwood launched his leadership challenge to Major in the summer, it was embarrassingly clear that even he was going for the soft option involving vague promises of efficiency savings as a way out. At the time Norman Lamont, who was campaigning for Redwood, was disquieted enough not to appear alongside him during the press conference.

Now both men are back on the conference fringe. Redwood has produced more detail on his earlier package, including cuts in government advertising, urban renewal, housing and civil service jobs. Lamont, much more radically, suggested transferring large parts of the social security system to the private sector, introducing charges for health care, boosting private health insurance and cutting means-tested benefits for people of working age.

This may be wild stuff, easier to say in a fringe meeting than in Whitehall. But when Lamont argues that the Conservatives are reaching the limits of credibility in regularly promising dramatic tax cuts while pulling back from the big spending controversies, he makes a strong, valid and timely point.

For the days when salami-slicing budgets, selling off assets and delaying capital programmes can be presented as the core of a convincing and radical tax agenda are nearly over. Booms, oil and privatisations have delayed the arrival of the obvious; but the obvious is now slouching into the political daylight. If there is no rethinking of what the Government does, then the state's share of spending is going to remain roughly where it has been. It certainly will not fall; and nor will the tax take.

One day the Conservatives will have to face up to this. When? In opposition, surely; these are truths too big for governments to handle.