The Conservative leadership gave notice yesterday that it would use green taxes to fund any tax reduction promises at the next election.

After a week in which the party high-lighted a policy group report calling for massive reductions in the burden of tax regulation and the abolition of inheritance tax, George Osborne, the Shadow Chancellor, dampened expectations by saying that the party would not be offering overall reductions in taxation. Any tax cuts that were identified would be balanced by tax increases elsewhere, such as green levies, he told a City press conference.

While promising changes to inheritance tax to ease the burden on ordinary families, Mr Osborne did not embrace the specific recommendations of John Redwood’s economic competitiveness group for its abolition, and for no duties to be paid on death on a person’s main home.

He made plain, however, that he would look at raising the current £300,000 threshold for inheritance tax – which is already due to rise to £350,000 by 2010 – and at reducing the rate of 40 per cent at which the tax was levied. He also appeared to be sympathetic to the proposal to axe the tax on a main residence.

Mr Osborne’s wider message was notably more cautious than the group’s report, which also called for cuts in stamp duty, raising the threshold for top-rate tax, the reduction of capital gains tax and a cut in corporation tax.

He risked disappointing the Right of his party, but he was clearly anxious to counter any suggestions springing from the publicity given to the Redwood report that the leadership is backtracking on making the public services its priority. At a time of turmoil in the world stock markets, Mr Osborne was determined to dispel any impression that the Conservatives would offer unfunded tax cuts.

Another Conservative policy group reporting soon is looking at environmental levies, including taxes on flights based on carbon emissions, a carbon tax to replace the climate change levy and higher road taxes for the most polluting vehicles.

Yesterday Mr Redwood said that lower taxes would make the economy more successful and that the best way to tax the rich was to cut and reform capital taxes so that more of the wealthy stayed in Britain and paid tax to the Government. Mr Osborne accepted the need to reform inheritance tax because it was unfairly hitting an increasing number of ordinary home-owners through rising house prices. “I will be looking very carefully at any proposals to ease the burden of this tax on these families,” he said.

Some Conservative MPs are worried that the outright abolition of inheritance tax would be seen as a change aimed at helping the very rich, who would pay no duties however valuable their main homes, or other homes if they have owned them for more than ten years. Mr Osborne said that for tax reductions to be meaningful they had to be sustainable. “So we will reduce taxes only when the country can afford it.”

During questioning he was even more careful. “We are unlikely to offer upfront overall reductions in tax at the next election. Any reductions of specific taxes will have to be balanced by tax increases elsewhere, most notably green taxes.”

Reaffirming that the long-term ambition was to share the proceeds of growth with everyone by reducing taxes and investing in public services, he said “we will not be able to offer overall reductions in tax at the election”. Asked if Mr Osborne’s pledge of higher green taxes would undermine his report’s aim of a lower-tax economy, Mr Redwood said: “I have every confidence George will be extremely wise and any advice I pass on will be in private.”

Mr Osborne described the report as “the most impressive and comprehensive analysis of the state of the British economy produced by any political party in recent times”. But while he emphasised the need for new environmental taxes, Mr Redwood said he believed that the best way of delivering a “green” Britain was through investment and technology.

The report includes measures to ease congestion – including allowing left turns on a red traffic light – and increasing rail capacity through measures such as introducing rubber wheels on commuter trains to make them more efficient.

The report also comes out strongly in favour of a new generation of nuclear power stations.

The policy review group was co-chaired by Simon Wolfson, the chairman of the Next fashion chain. He said that it would take an “enormous amount of political courage” to implement the recommendations.

He told The World at One on BBC Radio 4: “I’m not pretending for one moment that this list of things we would like to see deregulated is going to happen without that courage.”

Vince Cable, the Liberal Democrat Treasury spokesman, said: “This report shows that David Cameron’s Conservative party is stuck in Thatcherite Britain.” He said that the proposals would “widen the divide between rich and poor”, and would make the tax system more unfair.

Mr Cable added: “Despite all the rhetoric about not putting stability at risk, the Tories are hell bent on slashing taxes for the rich with no regard to the people who are really struggling in Brown’s Britain.”

Andy Burnham, the Chief Secretary to the Treasury, said that the report confirmed that the Tories had lurched to the right. “In order to shore up his weakened position, David Cameron has been forced to cave in to the right wing of his party. David Cameron is abandoning any pretence to the centre ground, and demonstrates that like William Hague, Michael Howard and other Tory leaders before him he is lurching to the right. This report [merely] endorses the £21 billion of tax cuts announced by the Forsyth Report – a scale of cuts more than that proposed by William Hague at the 2001 general election and Michael Howard at the last election.”

Which policies will Cameron adopt?

Probables

— Cut corporation tax to 25p for large companies, 20p for small ones

— Adapt taper relief system to cut impact of capital gains tax on saving

— Abolish or reduce stamp duty on shares, cut stamp duty on property

— Use private money to build roads

— Decentralise Network Rail so operators own the track they run on

— Streamline Transport Department

— Offer people tax incentives to donate to universities

— No compulsion to buy an annuity from pension fund on retirement

— Make work health and safety risk assessments “more proportionate”

— Where EU legislation applies, do not put in place extra UK regulations

— Scrap the ID cards scheme

— Abolish unelected regional government; reduce quangos

— Cut the number of civil servants, but without any redundancies

— Seek opt-outs from EU legislation in areas where UK legislation would create jobs and prosperity

— Streamline planning procedures

Possibles

— Abolish inheritance tax

— Raise the threshold at which the top rate of income tax is paid

— Remove bus lane restrictions for off-peak; bring in flexible speed limits depending on time of day

— Make lorries pay by the mile to use roads and reduce either the tax on diesel or vehicle excise duty

— Redevelop Heathrow to increase intercontinental traffic

— Appoint a Cabinet Office minister to keep red tape within a set “budget” for each department

— Remove the need for licences for small charity events

— Restore European Social Chapter opt-out, and produce UK rules on works councils, part-time and fixed-term working, sex discrimination

— There should be no maximum age to start drawing a pension

— Consider clearly splitting off BBC’s commercial activities from its public sector broadcasting duties

— Speed up planning process for nuclear plants

— Keep North Sea tax competitive

Outsiders

— Rephase traffic lights to give priority to major roads

— Allow traffic to turn left at red light

— Place cycle lanes on pavements rather than roads

— Fit rubber wheels to commuter trains to improve braking and acceleration, so more trains can run

— End regulation on mortgages

Sam Coates

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