Trump card or bust?

meets the Conservative back-bench finance committee.

With Tory MPs seeking ways to save the party from an electoral rout,

the suggestion that a promise to slash taxes to 20p in the pound, in a

phased three-stage reduction, has found growing favour. Conservative

chairman Jeremy Hanley became the first Cabinet Minister to endorse such

a move at the weekend.

Observers believe the proposal owes more to political than economic

realities. The think tanks, from both right and left, agree such a

programme would need a further round of reductions in public spending.

Social security cuts, job losses in the Civil Service and local

government, and a continuing lid on public-sector pay are identified as

the likely areas for spending curbs.

Mr Clarke is reported to be resisting the move. One City analyst says

the Chancellor's caution springs from fears that such a promise would

send the wrong signals to the City. If you put too much money back into

the economy it would create inflationary pressure:

''Too much too soon could create an element of panic in the City. They

might regard Government as losing control because of electoral anxiety.

The result would be a run on the pound which would force the Chancellor

towards a hike in interest rates. The Chancellor has to be extremely

careful about the signals he sends.''

This may also explain the refusal by Employment Secretary Michael

Portillo to be drawn on the wisdom of a pre-announced tax-cutting

programme although he continues to favour tax cuts over spending on

public services.

But the back benchers see tax cuts as the trump card needed to win

over alienated voters. Since 1992, the average taxpayer has paid out an

extra seven pence in the pound in tax.

The argument from those influential Tory MPs who want dramatic

measures to slash the basic rate of income tax is that improved economic

growth and a further pruning of public spending should be used to make a

specific commitment to regain voters' trust.

They point to Treasury receipts which they say are set to rise at #6

billion a year, enough to allow a three-pence cut this year, according

to Mr David Shaw, a leading right-wing officer of the committee:

''Growth in the economy gives us easily enough money to do it. I don't

think we have to look for big cuts in the public sector to produce the

three-pence reduction.''

So how would it be done? And where would the scythe on public spending

fall?

Economists agree that the social security budget, which continues to

grow, would have to be the major target. Education and health are

regarded as too politically sensitive with voters. Cynically, those on

social security do not have the clout of the health or education lobbies

and neither are they prime voting fodder for the Conservatives.

While revolt over education cuts in England has lost the Government

crucial support among middle-class English voters, and making inroads

into the health budget might be seen as even more politically damaging,

the argument runs that social security is a softer target.

That seems to be echoed in Mr Shaw's goals: ''We've already achieved

changes on disability allowances and to the job-seekers allowance. All

of these are moving in the right direction,'' he says.

''I think that we are beginning to see some levelling off of social

security growth. There are areas of expenditure that people don't want

to see touched -- education and health.

''The longer-term aspects of social security involve raising the

question of whether people can make private provision -- although that's

not something to be done in the next one or two or three years. I think

people are beginning to look and question whether certain groups should

be on social welfare.''

He also believes there is massive scope within Government to make

swingeing cuts: ''There is over-employment in many areas of Government.

They should look at British industry which is involved in de-layering

management. My feeling is that there's a lot more that could be done to

reduce numbers working in local government and the Civil Service. These

combined with increased efficiencies and savings to be made by extending

contracting out and competitive tendering are areas where savings could

be made.''

His argument is mirrored by Dr Madsen Pirie at the right-wing Adam

Smith Institute who claims millions could be saved by preventing fraud

on the social security system. Enough to sustain tax cuts of 3p in the

pound?

''Don't knock it. The social security budget is #90 billion which is

40% of all our spending. Eliminate fraud and you could save hundreds of

millions.''

Dr Pirie believes the three-year programme would be a simple reversal

of recent moves to phase in taxes, for instance when VAT on fuel was set

at progressively higher levels. ''You increase predictability. People

will know in advance what income tax they will be charged and can plan

their spending accordingly.''

However, Andrew Delnot, at the centre-left think tank, the Institute

of Fiscal Studies, derides Dr Pirie's argument on social security fraud,

pointing out that if there were massive savings to be made they would

have been easy pickings in previous rounds of spending cuts.

''It's disingenuous to pretend there's a free lunch somewhere out

there. If that level of fraud really existed, you would think that after

16 years we would be going after it. It's avoiding the main issue.''

Mr Delnot says the call for a rolling programme of tax cuts is a

confusion of political and economic arguments. He accepts that the

economy has grown more quickly than expected but believes there is a

flaw in the argument that says economic growth will continue at the

current level of around 4%.

He also believes it is extremely difficult to identify large areas of

public spending which remain to be slashed: ''I am cautious. I have been

surprised by the extent to which public spending has been held back. But

it gets increasingly difficult. The truth is cutting public spending by

any significant amount would mean taking extremely hard decisions.

''We can't avoid the main issue which is that we can't continue to cut

taxes and spending, even if you can for a little while. History suggests

there is a limited period in which you can do that.''

Gerald Frost of the the Centre for Policy Studies, the Thatcherite

think-tank, inclines to the view that a three-year programme would tie

the Chancellor's hands:

''It would mean making a commitment to reduce taxes over a given

timescale which will involve implications for public spending. It has an

obvious appeal to the taxpayer, but it would perhaps tie the hands of a

Chancellor who might have to deal with unforeseen problems which would

force him either to reverse the commitment or alter the timing.''

Another political argument against the suggestion holds that voters

have notoriously short memories. Announce tax cuts now and they will

take them for granted when they appear three years hence, thus lessening

the beneficial impact.

Other more sceptical observers point out that while the Government is

keen to focus on the basic rate of income tax, what is important for

taxpayers is the threshold on which they pay it, the levels of personal

allowances, because it is that which determines how much of their income

is taxed. As economic recovery gets people off benefit and back into

work, the amount of tax take increases:

''It is the activity in the economy that determines how much you take

in in tax revenue,'' said an Edinburgh tax consultant. ''It is the

number of people paying tax that matters, and it is that which people

fail to grasp.''

Too much too soon could create an element of panic in the City. They

might regard Government as losing control because of electoral anxiety