Hey, big spenders, this can't go on

TORY MYTH Taxes will fall after the election; Britain cannot afford fiscal luxuries until the damage done to its finances has been repaired
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The Independent Online
"Labour's tax bombshell" turned out to be the Conservatives' lethal weapon in the last general election campaign. So comforted is the Government by the memory of what arousing voters' fears of Labour tax increases accomplished last time around that it would like to do so again.

Its problem is that it cannot take direct aim. New Labour has gone to enormous lengths to shed the party's old tax-and-spend image, with some success. More important, there is the embarrassing matter of the tax increases the Government itself imposed right after the last election. It can scarcely make the same pledge again without stretching credulity.

The Conservatives have therefore resorted to vague allusions to jam at some stage well after election day, combined with a sweetener in the form of a penny off income tax on 1 April. During the next Conservative term, we are told, the basic rate of income tax would fall to 20p in the pound, and capital gains tax and inheritance tax would be abolished - when affordable. After all, we are talking about the party of prudent economic management.

So prudent, in fact, that the National Debt has doubled since John Major became prime minister, and for the past two Budgets Kenneth Clarke has had to postpone the date when he expects government spending and revenues to be in balance. This record makes the Government's tax-cutting pledges as trustworthy as a pension salesman's patter when he promises you a retirement spent on a cruise ship.

Despite the penny reduction in the basic rate of income tax last year and this, the share of tax revenues in the economy has risen by just over 1 per cent of GDP since the last election. That is equivalent to pounds 7.5bn, or more than 4p on income tax.

Privately, Conservative politicians will admit that mistakes were made prior to May 1992, requiring this dose of unpleasant medicine afterwards. Although they cannot say so publicly, they distance themselves from the earlier tax bribes.

Disowning recent history is meant to make it plain that there is a new era of responsible economic management. The implication is that when the next Conservative government resumes its tax-cutting agenda, it will deliver lower taxes that last.

This agenda will look very plausible during the next few months. The latest figures for government borrowing, the shortfall between income and expenditure, were surprisingly good. The economy is expanding fast enough for tax revenues to flood into the Exchequer's coffers for some time. Whoever forms the next government will inherit an unexpectedly good position in the short term.

But any post-election tax cuts would be ephemeral. By the time the next recession comes along the government finances will require more painful corrective surgery. Either higher taxes or spending cuts are necessary now in order to put them on a sound and sustainable footing, to borrow two of the Chancellor's favourite adjectives. For if there is any time when the government should be running a budget surplus, it is now, after five years of economic recovery. Instead, last year it was in the red to the tune of nearly one-twentieth of national output.

In his Dictionary of Received Ideas, Gustave Flaubert set out a taxonomy of conventional wisdom. His entry for Budgets was short: "They never balance." This 19th century complacency anticipated the Keynesian economists' view that government borrowing is a good thing. It pumps up the economy, permits growth in public expenditure; and, besides, reducing it is difficult.

But politicians, backed by expert opinion, have rediscovered fiscal orthodoxy. Over the course of a business cycle the government should not borrow too much. Some would say that its budget should actually balance over the course of several years.

It is the experience of massive borrowing that has prompted this swing in opinion. Britain's doubled national debt has made interest payments the fourth biggest category of public spending. High levels of government borrowing have led to interest rates much higher than they would otherwise need to be. There is a danger of falling into a vicious circle of having to borrow more simply to meet debt interest payments, a trap the Italian government has fallen into.

One independent economist, Martin Weale at the National Institute for Economic and Social Research, has called for an improvement through higher taxes of up to pounds 14bn - more than 7p on income tax - in the government's financial position to get back to a sustainable path. The Chancellor tried yesterday to divert attention to holes in Labour's financial plans, but the problem is of the Government's own making.

Much as we would all like to pay less tax, it is a luxury that should not even be discussed until the financial damage has been repaired. Then would be the time to investigate the Conservative view that a shrinking tax burden is desirable. For the time being, it is not remotely sensible.

A prudent Chancellor would set improving finances in the run-up to the general election against their inevitable worsening later. The Conservatives have not found a way of balancing the books that has somehow escaped the Opposition's notice.