fear of finance

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The Independent Online
It took the Government and the media about 40 minutes this week to realise that if Gordon Brown keeps his promise not to raise the standard or higher rates of income tax during Labour's first term in power, there are another 200 possible tax variations that can be used to raise the overall level of tax.

Many City experts think that total taxation will have to rise to balance the budget whichever party wins the election. The budget deficit is still uncomfortably high at this stage of the cycle.

If the deficit is bad now, it is certain to get worse when the economic cycle turns down, the economy slows and tax revenues stagnate, as they all must at some stage in the next five years. Anyone who promises not to raise income tax rates in five years is effectively serving notice that sooner or later some other taxes will have to rise, or public sector borrowing will have to be increased to fund the gap, something which would send the City into orbit.

The only other option is not just to hold public sector spending for the first two years, as Mr Brown has committed himself to do, but to make further cuts in existing programmes, something which even Mr Brown would find difficult. Quite apart from the protests from traditional Labour supporters, who tend to be hardest hit by spending cuts, 18 years of Tory rule have cut out much obvious waste.

If it is other taxes which take the strain, where will they fall? The Treasury might advise the chancellor to load an increase on National Insurance contributions, which are supposed to pay for pensions and the health service but in fact are an income tax in all but name. A Labour chancellor might pass off an extra 2p in the pound on NI contributions as a move towards funding a universal extra pension, but hardly anyone would fail to see through the ploy.

Another possible Treasury wheeze would be further reductions in tax-free allowances, including everything from personal allowances and married couple's allowances to mortgage tax relief. But here again the majority of people would fail to appreciate the fine difference between paying higher income tax rates and paying more income tax because allowances had been removed.

Corporation tax rates could be increased but the Labour Party's honeymoon with business would not survive that. The windfall tax on privatised monopolies might raise pounds 5bn but this is meant to be a one-off levy.

The next-best option is to increase the yield on VAT, but surely the Labour Party has boxed itself in there too. It can neither raise the standard rate above the current 17.5 per cent nor can it extend coverage on to currently untaxed items without doing precisely what it has regularly condemned the Tories for doing.

Excise duties are a busted flush by now. Higher taxes on tobacco are just as likely to reduce the yield as they are to raise it because it discourages consumption and the same may soon apply to alcohol where higher duties simply encourage more cross-Channel trips for cheap French booze.

The remaining options are to put a much heavier load on minor taxes, including capital gains and inheritance tax, put a ceiling on PEP allowances, or find a new source of taxation, such as a tax on telephone calls. Another option would be to shave the tax privileges of investment funds and pension funds. Again voters would very quickly realise that their pockets were being hit just as surely as by income tax increases, and increased taxes on investment funds would directly undermine the policy of encouraging everyone to provide for their own pensions and long-term care.

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