Business Comment: Taxing questions raised by the Green Budget

The Green Budget presentation by the IFS and Goldman Sachs is always fascinating, unrivalled in its thoroughness and clarity. It sets out, with a bluntness rare in the official version, the drawbacks of government tax and spending proposals.

This time it is especially interesting because of the closeness of Gavyn Davies, the chief economist at Goldman Sachs, to Gordon Brown. Yesterday's Green Budget has given us all an insight into the advice he has been giving the Chancellor.

The bottom line was that there is no urgent need for an increase in taxation, that the public finances are probably in a sustainable position without any remedial action by Mr Brown. Mr Davies' line of argument was that plans inherited from Ken Clarke already involve a substantial tightening in fiscal policy, so that by the time the economy is back at its long- term trend next year, government borrowing will be at the target long- run level of around 1.5 per cent of GDP or pounds 12bn.

There are two crucial assumptions here that make all the difference to whether or not you believe there remains a structural "black hole" in government finances.

One is that the Government will stick to the spending plans with a ferocity that even Mrs Thatcher failed to achieve. If, on the other hand, spending follows the pattern established over the past 18 years, it will take the PSBR higher - nothing frightening but above the long-run target by about 1 percentage point of GDP.

The other assumption is that the economy gets back to its trend next year rather than this. If it is there now, borrowing ought to be running at half its current level already.

There are excellent reasons for the Chancellor not raising taxes by very much, but they are chiefly political. Labour would be as damaged by a betrayal of the electorate's expectations as John Major's government was by its 1993/94 tax hikes. The economic case for putting government finances on a truly sustainable footing, rather than a possibly or probably sustainable one, still remains.

There could be no clearer indication of this than another figure in the Green Budget. Low investment, asset sales and high borrowing have cut the worth of the public sector by two-thirds in the past seven years. If the entire machinery of government were closed down today and all its possessions, including every road, hospital and school, were sold off, it would fetch only pounds 160bn. Taxes may not go up this Budget, but eventually they will have to if Labour wants to rebuild the kind of Britain we all want.

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