TAX and benefit changes planned to help the unemployed back into work are being planned for next month's Budget as some Cabinet ministers believe that Kenneth Clarke, the Chancellor, has more room for tax cuts than he is admitting, write Colin Brown and Nicholas Timmins.

Help for the low-paid, intended to improve incentives to take work, will form part of a determined carrot-and-stick approach to reducing unemployment, which will become clearer when the Government publishes its White Paper on the Jobseeker's Allowance - probably next week. The allowance, which will replace unemployment benefit and income support for those judged capable of work, will require claimants to sign a written contract stipulating what they will do to apply for jobs, go to interviews, attend courses and get retrained.

JobCentres will have wide discretion to set conditions for receiving benefit. The aim is to motivate the unemployed but also drive those working 'on the side' out of the hidden economy. The 'back-to-work bonus' announced last week is one of the carrots - making it worthwhile to declare part- time work - with Mr Clarke working on tax and benefit changes to further improve incentives for employment.

Measures under consideration include improvements to family credit and cuts in National Insurance contributions for low earners.

Mr Clarke, however, appears determined to use whatever leeway he has to reduce the public sector borrowing requirement down below its forecast pounds 30bn next year and pounds 21bn in 1996-97 and pounds 12bn for 1997-98. That would leave room for tax reductions ahead of the next general election.