Brown kills tax and spend once and for all

`The income tax commitments may have been eye-catching, but in practice they did not involve important new constraints on Labour's future freedom of manoeuvre'

During the Napoleonic War, the Duke of Wellington was required by the Treasury to account for every last detail of his army's expenditure. In reply, he asked "for elucidation of my instructions from you gentlemen of Whitehall so that I may better understand why I am dragging an army over these barren plains. It must be one of two alternative duties. I shall pursue either one, but I cannot do both. First, to train an army of uniformed British clerks in Spain for the benefit of British accountants... or perchance, second, to see to it that the forces of Napoleon are driven out of Spain."

We are reminded of these words in a recent article by Nick Monck, formerly of the Treasury, who recognises that the control of public expenditure has been a contentious topic for as long as monarchs have levied taxes on their subjects, and accepts that an incoming Labour government will face huge pressure from the public services to repair two decades of Tory "underfunding". But he then puts in a cogent plea that a new Labour government should retain a "strong Treasury", focused mainly on accounting for the public sector's candle ends, and pre-setting overall spending targets largely independent of the views of the spending ministers themselves. His key point is that the control of aggregate spending is so difficult, and so important, that the entire public spending mechanism needs to be designed primarily with this in mind. Any relaxation in intent, he implies, will lead to an unintended explosion in spending. (Mr Monck's article appears in a valuable new collection of studies edited by Dan Corry of the IPPR, a think-tank not beloved of Michael Heseltine, but in this case a front for hard-headed analysis.)

Mr Monck's article also contains the following prophetic passage: "If a new government arrives with a clear commitment on borrowing (the golden rule), and a belief that taxes cannot be raised significantly without jeopardising the chances of re-election, the level of expenditure will have been largely determined. Accepting this would then be quicker and simpler than a wholly new start, and would be more like deriving ceilings from previous plans."

He is right. In fact, his article might have been the inspiration for Gordon Brown's watershed speech on tax and spend last Monday. For although Mr Brown's speech was initially noticed mainly for its promises on tax, its most important new commitment was to keep spending at the levels set by Kenneth Clarke until the end of 1998/99.

The income tax commitments may have been eye-catching, but in practice they did not involve important new constraints on Labour's future freedom of manoeuvre. No Chancellor would contemplate increasing the basic rate of income tax, except in the kind of extreme circumstances which would probably bring down a government anyway. Furthermore, an increase in the top rate of income tax would have raised little more than pounds 1bn. Giving that up was a small price to pay for the political statement made. Even when added to Labour's other two commitments on tax - to reduce VAT on fuel from 8 to 5 per cent, and to avoid an extension in VAT coverage to food, fares, children's clothes, books and newspapers - there are plenty of other places for Mr Brown to look if he ever chooses to raise the burden of taxation.

This is presumably why he decided to give the electorate some extra reassurance on tax. Initially, he hit upon the formula of saying that Labour had no new spending commitments which would require extra tax to finance them. That seemed fairly watertight. But it was eventually deemed not enough, since spending and tax could still rise for reasons unconnected with Labour's programme (as a result of higher unemployment for example). So last week Mr Brown went further and fixed the absolute total of spending at Mr Clarke's level.

The key question is whether this development, which offers the electorate a belt-and-braces guarantee on tax and spend, limits an incoming government's future freedom for manoeuvre in an unacceptable way. On the surface, there does seem to have been a loss of manoeuvrability here - after all, until last week, it would have been open to Mr Brown after the election to have made an immediate change to the Clarke spending targets, on the grounds that they had been set unrealistically low for political reasons.

Even if this was not being contemplated, the precise target for government spending in 1998/99 did not have to be finalised until November, and much can happen to change the appropriate level before then. This degree of elbow room has now been abandoned.

Furthermore, Labour has now voluntarily accepted the terms of an ingenious trap that was set for the next government by Mr Clarke's last two Budgets. In both of these packages, the Chancellor reduced the burden of taxation, justifying this on the grounds that public expenditure growth would be held down to implausibly low growth rates in the next three years (as the graph makes clear). Only if these spending plans can actually be delivered does the path for government borrowing in the Budget plans look even remotely appropriate.

This is the crux. Without the option of extra borrowing, any increase in the spending total obviously implied an acceptance that the burden of tax would rise. And Messrs Blair and Brown genuinely do not wish to see this happening. No doubt they recognised that the arithmetic would apply just as remorselessly after the election as before it. They recalled that the 1974-79 Labour government never recovered from losing control of the purse strings in its first six months, and resolved that this was not going to happen to them. All of this being the case, why not bite the bullet immediately, when they might gain some electoral advantage from the announcement, and when any opposition to the decision from within their own ranks was likely to be more muted than it would be after polling day?

Of course it would have been more convenient if Mr Clarke had not cut taxation in the 1995 and 1996 Budgets, so that a higher baseline for tax receipts could have been allocated either to lower borrowing or to more realistic spending targets. But with Mr Clarke having cut taxation, all of Mr Brown's options were circumscribed and difficult. At the end of the day, it was more a question of when, rather than whether, to accept the spending totals. (Ironically, while the Clarke Budgets may have failed to win the 1997 election for the Tories, they might do more to contribute to the re-election of his party in 2002, after the electorate has observed Labour's attempts to hit his spending targets.)

There will be difficult times ahead. Although there has been no outcry from the Labour Party this week, the muffled sound of gnashed teeth and bitten lips has emanated from many quarters, including some very close to the New Labour camp. Will Hutton has even suggested that Mr Brown's landmark speech could mark the end of "the social democratic project" in Britain. The Royal yacht will not be the only important casualty of this decision.

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