Mandelson raises stakes in tax row

Business Secretary Lord Mandelson said that a Conservative government would face a 30bn hole in its spending plans which could only be filled by raising VAT to at least 20 per cent.

Tory leader David Cameron again insisted his party's proposals to reverse part of the Government's planned increase in National Insurance contributions were fully funded through efficiency savings.

He also stressed his determination to secure an outright victory in the forthcoming General Election, warning that a hung parliament would be damaging for the country.

The Conservatives claimed an early victory in the pre-election manoeuvring after a series of high-profile business leaders came out last week behind their promise not to implement the National Insurance increase due next April on incomes under 45,000.

Shadow Chancellor George Osborne said it would be paid for through 6bn of public sector efficiency savings to be implemented this year.

However Lord Mandelson said the Tories had failed to explain how they would fund the commitment for the rest of the parliament – something, he suggested, could only be done by raising the standard rate of VAT from 17.5 per cent to 20 per cent.

"In cancelling that tax increase they are not just taking 6bn out for next year, they are taking 6bn out for five years if they are elected. That is a 30bn hole in their financial plans on top of the unfunded promises they have already made," he commented in a TV interview.

"The Conservatives know fully well that if they are cancelling one tax increase, they would need to set out where the alternative tax increase will come from. I can't see any alternative but to go for a hefty VAT increase.

"I think it is in all probability, given their unfunded spending and tax promises, likely to be 20 per cent or more."

But Mr Cameron insisted the Conservatives' planned spending reductions were sufficient to enable them to partially reverse an increase which "penalised jobs".

"This is not a tax giveaway, this is just stopping one of Labour's tax rises and saying, frankly, they have got it wrong," he said.

"We will be borrowing and spending less than Labour would in 2010 and that enables us, not to stop all of the tax rises, but to prioritise as progressive Conservatives the tax rise that hits the economy, that hits jobs."

Despite the latest opinion polls showing the Tories widening their lead over Labour, Mr Cameron acknowledged the result of the election would be "tight".

Nevertheless he insisted that an outright Conservative majority was "do-able" and he refused to be drawn on the possibility of a post-election pact with the Liberal Democrats.

"We are fighting for an overall majority, we think that would be best for Britain.

"We think a hung parliament would be damaging, the uncertainty would be bad for Britain," he said.

"We need a decisive government that can take long-term decisions. That is what we want to deliver."