Labour tax plans will push up loan rates, warns Clarke

The government last night fought off all-party criticism of Gordon Brown's tax policies which his Conservative predecessor, Kenneth Clarke, warned would help to push up both interest rates and sterling in the long run.

As MPs began their annual debate on the finance bill, which implements Mr Brown's fourth budget, the chancellor's no 2, Andrew Smith, moved to head off such criticism in advance by confirming that up to £20bn of windfall revenue from the auctioning off of mobile phone licences will be used to pay off government debt - not to fuel public spending.

"The prudent thing to do with such a large income is to use it to reduce debt, and that is what our plans are," said Mr Smith, who is chief secretary to the Treasury. He spoke after the veteran Labour ex-Treasury minister, Robert Sheldon, had complained that the mobile phone receipts - once estimated at just £10bn - were not even mentioned in the budgetary guide, the so-called "red book."

With many Labour MPs keen to boost spending as election day approaches Mr Sheldon observed: "That's a large increase in the revenue. Not all of it will come in this financial year. But it should have some impact either on the expenditure or possibly on the revenue side."

Mr Smith stuck to the Brownite theme of "sound public finances" which he contrasted with Tory commitments to "reckless tax pledges for the few" - a reference to Michael Portillo's "tax guarantee" to cut income tax over a parliament.

The shadow Treasury secretary, David Heathcoat-Amory, took a different line of attack when he complained that Labour was spending £2bn a year more on central government services since 1997.

The former Tory chancellor, Kenneth Clarke, said "hand-wringing" ministers and Bank of England officials could not be indifferent to the damage to farming and manufacturing caused by the high level of sterling.

He urged Mr Brown to "return to his former girlfriend, Prudence" but warned that, in the long-term, the chancellor is loosening fiscal policy. Instead of helping the Bank to keep interest rates down, that would do the opposite, that would push sterling still higher, he warned.

Mr Clarke said the government was "very slowly losing control" of "an improving (economic) situation, a good situation".

"This government is turning to an old tax and spend government after all," he said.