THE British government is preparing Budget plans on the assumption that European Monetary Union will go ahead in 1999 as planned amid concern that its possible effects on sterling could further limit scope for tax cuts.

As Tories reacted angrily yesterday to warnings by Mr Kenneth Clarke, the Chancellor of the Exchequer, that he may not be able to deliver significant cuts, ministers believe the financial markets will be especially susceptible to signs of fiscal irresponsibility in the run up to a single currency.

Conservative backbenchers fear a shortfall in revenues, which has led to borrowing running above this year's forecast of £22.5 billion sterling, could destroy chances of a tax cutting budget, seen by many as vital to the party's slim election prospects.

The acknowledgment that further financial prudence will be required to protect sterling as the EU prepares for a new exchange rate mechanism by the end of the year will alarm Tory Eurosceptics. It appears to run counter to the prime minister's strongly held view that a single currency will not be in place by 1999 and will not affect the party's general election strategy.

However, the Irish Government, which takes over the EU presidency in July, believes the ERM plans, which envisage a significantly stronger role for a European central bank, will be in place by December.

The British have made it clear they will not take part in any revived ERM or in the single currency if it is operational in 1999.