Jeremy Warner: Middle incomes hit worst by tax squeeze

Outlook: We all know that taxes will eventually have to rise to pay for the present splurge of reflationary initiatives and bank bailouts. Analysis by The Institute for Fiscal Studies published yesterday spells out precisely how much. For middle-income earners upwards, it doesn't make pretty reading.

Yet the most glaring statistic is that by the time the latest tax and national insurance adjustments bite in 2011/12, the average family with children will be almost £1,500 a year worse off than they would have been under the tax system as it existed when Labour first came to power in 1997.

Even with this tax squeeze, the Government is struggling to reinject credibility into the public finances. To get back to a balanced budget, the Treasury has had to stretch the forecasting period to beyond the general election after next, as well as make some heroic assumptions about growth in the meantime.

And despite the tax rises, the majority of the work in restoring the fiscal position to health is forecast to come not from the tax base but by squeezing public spending. Just think what will have to happen to taxes if these spending targets aren't met.

The Government is stuck between a rock and a hard place. Politically, it is little short of disastrous to be admitting to the electorate that they will be much worse off after the next election because of tax rises. Yet to reassure the markets, and head off the possibility of a sterling crisis, the Treasury has to be offering some kind of a path back to fiscal rectitude, however implausible.

John Maynard Keynes used to advise that we should look after the short run and the long run would take care of itself. To many, the remark seems more applicable now than at almost any time. Focus on the immediate problem of avoiding economic disaster, they argue, even if that involves nationalising the intransigent banks and forcing them to lend at cost and quantity the markets would never allow, and worry about the consequences later. Unfortunately, it is never quite that simple. Long after Gordon Brown has gone, the Treasury will still have to be around to clear up the mess.