The honesty that made backbenchers gasp

Budget Comment

There had been a big budget secret after all, announced at the end of his speech with the melodramatic flourish that no self-respecting Chancellor can ever resist. The announcement of more than pounds 3bn of new spending on health and education, two-thirds of it from the contingency reserve and a third from the windfall tax, thrilled Labour backbenchers. Moments earlier, some of them had gasped audibly when Gordon Brown had reaffirmed, in ultra-austere mode, that ministers would have to stick to the chafing control totals set by the previous government.

Even with the new money, spending constraints on the cherished priorities of health and education will still be dauntingly tough. But the new spending announcement helped to underline that after weeks of grandstanding on the international stage, the Government has not lost sight of its main domestic goals. It made it all the more difficult for the privatised utilities to complain credibly about the impact of the windfall tax: can BT, British Gas and the water companies really not afford to help schools in pre-First World War buildings? Even Kenneth Clarke, while attacking the concept of the windfall tax, was forced to admit yesterday that the use of pounds 1.2bn of it for school buildings was well judged. And the eager young Labour MPs elected in May fell on the announcement like thirsty desert travellers in an oasis.

The secret made something of a mockery of the largely synthetic parliamentary row over budget leaks which had delayed Brown's speech for 15 minutes. Blair and Brown had agreed last December that they would raid the contingency reserve for money to cushion the impact of the stark decision to stick to Kenneth Clarke's control totals for the first two years of the parliament. They did so after painstakingly checking with the most senior Treasury officials that the move would not undermine the Government's reputation for fiscal credibility. Neither the criticism on the left of Brown's hair- shirt announcement, nor the heat of the election campaign, nor the renewed expectations that a landslide victory had excited among some ministers, had dragged the secret out of them. Incredibly, it wasn't until Monday of this week that either of the two ministers most closely concerned, Frank Dobson, the Health Secretary, and David Blunkett, the Education Secretary, were told of the plan. The rest of the Cabinet didn't know until yesterday. Nor was it the only big surprise: the cut in corporation tax of 2 per cent, reducing the rate to a business-friendly level of 31 per cent, lower than that of Britain's major competitors, also never leaked.

As for the rest, the Budget was as striking for its consistency with previous economic statements, in opposition and in office, of both Brown and Blair. For all the huffing and puffing, for example, about abolishing tax breaks for private health care for the elderly, Brown had always made it clear that he intended to make that change to meet the costs of reducing VAT on fuel to 5 per cent. Indeed, it was a bit rich for the Tories to attack it. The tax break was invented by the Thatcherite No Turning Back group in the Eighties to open up the prospect of much wider incentives to the well-off to switch from the NHS to the private sector. And as such it had been forced through by Margaret Thatcher against the vociferous opposition within her own government not just of Kenneth Clarke and David Mellor, when they were health ministers, but also of Nigel Lawson, who regarded it as a hopelessly wasteful means of subsidising those already using the private health sector.

But those are details. The overriding impression of the Budget calculations is that Brown has, as promised, managed to be both radical and responsible. The windfall tax is on the high side of expectations, allowing him to do more - for the adult unemployed, for single mothers, and for the crumbling fabric of school buildings - than merely help the 250,000 young people who have been unemployed for six months or more. This is a big hit, albeit a popular one, against capital to pursue a social goal.

But at the same time Brown has shown that he is not prepared to use the one-club policy of interest rates to curb the kind of boom that the Tories failed to curb in the late Eighties. To do so would have risked putting the pound, through higher interest rates, up to a level that would have simply crippled British exports. Faced with the huge, pounds 25bn injection into the economy of the building society windfall payments, he decided to hike up individual taxes in a way that still leaves intact the manifesto pledges on tax rates. This provoked two entirely opposite criticisms yesterday. One, in the City, was that he had hit the corporate sector too hard and personal taxes not hard enough. Yet Treasury figures show that excluding the windfall tax, fiscal tightening will be pounds 3.4bn this year and pounds 4.1bn next year - not a small sum, particularly since around half of it is on individuals, such as the increase in stamp duty and cuts in Miras.

The other criticism, from the Tories, is that he has somehow broken the spirit of the manifesto by increasing personal taxation at all. The letter of the manifesto required him only to leave rates intact. He had always warned that this was not a pledge on the huge complex of reliefs and allowances, and the spirit also required the fiscal stability to which he has now ambitiously committed himself. Two tests await: will his tax increase avert the need for significant interest rate rises, and will the welfare- to-work programme work? If those tests are passed, then the Budget will be seen to have been not just well judged, but a triumph.

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