One-stage rise in VAT on fuel urged: Colin Brown reports on the Chancellor's options, as spending plans come to a head

KENNETH CLARKE is under pressure from Cabinet colleagues to raise VAT on fuel to 17.5 per cent in one stage next April to limit the political damage and ease the problems over public spending.

The Chancellor will chair the EDX Cabinet committee on public expenditure at meetings every day next week, as the spending rounds come to a crunch. Roads, defence and social security benefits are in the front line for cuts to meet the ceiling of pounds 253.6bn for next year.

Cabinet ministers have been told to accept cuts in the planned totals, which were agreed last year, to compensate for a cyclical increase in welfare spending, in spite of the purge on social security spending, including invalidity benefit, sick pay and unemployment benefit.

Cabinet colleagues have told Mr Clarke they would support raising the VAT in one go, rather than in the two stages proposed by Norman Lamont, to avoid prolonging the political pain.

The Chancellor is attracted to the idea because it would raise pounds 2.3bn, rather than the pounds 950m pencilled in for next year from the planned 8 per cent tax rate. It could be coupled with a pounds 600m to pounds 700m compensation scheme for the poor, to be announced in the Budget.

Mr Clarke is keen to reach the 'nearly poor', who could be left out if compensation is limited to those on Income Support. He has emphasised that it is proving difficult to design a scheme, but his colleagues have urged him to extend it to those on housing benefit, and lift the savings rule to avoid those with savings of more than pounds 8,000 being excluded.

Mr Clarke has warned that there will be 'blood on the walls', and has told colleagues that capital projects which were protected last year cannot escape.

John MacGregor, the Secretary of State for Transport, is expected to be forced to concede cuts in his roads programme, coinciding with a shift towards environmental action to curb road use. It will mean that many much-needed by-passes could be postponed. Mr Clarke is also unimpressed with demands to protect prestige projects, such as the Channel tunnel link, but it is likely the Prime Minister will resist such cuts.

The formal EDX sessions were suspended for this week's Conservative Party conference, but Malcolm Rifkind, Secretary of State for Defence, has been fighting a rearguard action at Blackpool to protect his budget from deeper cuts in future years.

Virginia Bottomley, Secretary of State for Health, is said to have impressed the EDX with her bid last week, and has secured enough to fulfil the Tory election pledge that spending on the NHS would be increased in real terms each year. She is giving priority to reducing waiting lists, but hospital beds will still close, and prescription charges will rise.

The battle over spending will intensify the ideological tensions between ministers, which began to surface at Blackpool after the apparent 'lurch to the right' over law and order, Europe, and curbing welfare benefits.

Douglas Hurd, the Foreign Secretary, and Mrs Bottomley reaffirmed the Tory commitment to some state spending. But some leading right-wingers are worried about the cuts in defence.