From Dorneywood, the sound of options closing

INDUSTRY VIEW

It's time for the summer office outing to Dorneywood. The red boxes click shut, the government cars purr, and the Chancellor and his officials head for the country. With an interest rate cut hanging in the air behind them, and speculation about an October election rife, the annual weekend away to discuss options for the Budget will be more frenetic than ever.

To listen to politicians, you'd think that tax cuts and feel-good factors would be the main things on Kenneth Clarke's mind. Not so. If Mr Clarke is really attuned to the demands on his last pre-election budget, he will be worrying most about public spending. Just as in 1992, spending will hold the key to the way people vote. And this time detailed tax and spending decisions, rather than simply global figures, will matter too.

Pre-election Budgets are a strange phenomenon. Usually when the Chancellor appears with his battered brown briefcase, he is talking directly to the electorate - offering us a penny off tax here and a few pence on beer there. Before elections, however, Budgets are triangular conversations; the opposition have a voice too. The ideal budget for Mr Clarke will be one that not only appeals to voters, but wrongfoots Labour too. Which is why - believe it or not - spending plans matter so much.

Take 1992 as a case in point. Conventional wisdom has it that the Conservatives won the election on tax. In his March 1992 Budget, Norman Lamont cut taxes with a new 20p band. Meanwhile, so the story goes, Labour shot itself in the foot with the infamous Shadow Budget. Once John Smith had promised to raise taxes on voters earning pounds 25,000, it appeared that victory was at hand.

The truth is more complicated. The important difference between Labour and the Conservatives in 1992 lay in spending, not in tax. The fact that Labour wanted to spend several billion on child benefit and pensions in the Shadow Budget was only the start. Add on an unemployment programme, capital allowances to boost investment, pounds 1bn extra spending on health and pounds 600m for education, and you reach a tidy sum. No wonder Labour had to promise tax increases. The fact was that they needed to show where they were going to get the cash.

But even this was not decisive. Most voters in 1992 did not feel that they were choosing between Norman Lamont's tax cuts and Labour's child benefit increases. The Institute for Fiscal Studies modelled John Smith's Shadow Budget at the time and showed that eight out of ten households would be better off because of the increases in tax allowances and universal benefits that Labour promised. Yet more than half of voters believed they would pay more tax with Labour.

Behind voters' perceptions of Labour's tax plans lay their views about what Labour really wanted to spend.

As David Mellor (then Chief Secretary to the Treasury) aggressively pointed out, the Labour Party had countless other policies which would have cost a considerable amount to implement. The fact that Labour qualified their proposals with the phrase "as resources allow" didn't convince many people. The message was clear: Labour's instinct for solving the ills of the world was to spend more money on them.

What an easy target for the Conservatives. Exactly five years ago this month, David Mellor launched his "Labour's going for broke" campaign. Using spurious assumptions he came up with a total bill of pounds 35bn. From there, it was a short and easy step to calculate a tax bill to match and launch a campaign on Labour's pounds 1,000 tax bombshell later in the year. Labour's Shadow Budget was no match for such a powerful and persuasive campaign. The fact is that the Conservatives won the election a full nine months before the votes were counted, and they won it on public spending.

This time Mr Clarke won't get such an easy ride. Labour have avoided making uncosted spending commitments. Their most costly programmes for the young and long-term unemployed are to be paid for by a windfall tax. Ideally Mr Clarke would love to be able to characterise Labour as profligate socialists (as his predecessor did before him). Labour are not giving him the chance.

Mr Clarke's freedom to move on tax and spending is even more limited than Mr Lamont's. His predecessor's combination of tax cuts and spending increases was achieved by fiddling the figures. Initial forecasts by Treasury economists had put the public sector borrowing requirement for 1994/5 at pounds 35bn. Mr Lamont's published forecasts read pounds 25bn.

Norman Lamont's PSBR scam will be a difficult trick to pull twice. Voters and markets are already suspicious about Treasury projections. Kenneth Clarke's forecasts for borrowing made in last November's Budget are widely agreed to be over-optimistic.

So, as the Dorneywood crowd will be well aware, the Chancellor has two tasks if he is to win on tax and spending again. First he has to convince the public and the City that he has a way to fund any tax cuts he promises. And he has to find detailed tax and spending proposals that will make life as difficult as possible for the new, cautious, prudent Labour Party.

We can expect, for a start, more on the Private Finance Initiative, and perhaps a revised plan to privatise the Post Office and raise some more cash that way. Cutting capital spending, cutting funding for local authorities and cutting running costs are all among the usual suspects.

But these kinds of cuts are no use for winding Labour up. Kenneth Clarke wants measures to show Labour up as a high spender after all, or at least as unwilling to face up to tough choices. The Jobseeker's Allowance is a perfect example: the Government cut entitlement to non-means-tested benefits for the unemployed from a year to six months. Had Labour, in their obvious anxiety about the policy, fallen into the trap of promising to reverse it, the Conservatives would have immediately demanded to know where the cash was to be found. Watch out for spending cuts in a similar vein that Labour will hate, but that will be expensive to reverse. Means- testing invalidity benefit perhaps? Or further cuts in entitlement to housing benefit or one-parent benefits.

Labour have already been seeking their own symbolic cuts and switches in resources so they can promise new policies but not be outmanoeuvred at the last minute on tax and spending. Hence the review of child benefit for 16-18s, loans for graduates, and the switch of cash from assisted places to reduce class sizes for 5-7s.

If the tax and spending debate between the two parties really does shape up into a choice between particular symbolic priorities the public could be in for a pleasant surprise. What we really want to know is how the parties think taxes should be distributed, and what their most important spending priorities are. David Mellor's pre-1992 caricature of the parties as high-tax-high-spend Labour versus low-tax-low-spend Conservatives obscured more than it explained. Maybe, just maybe, the tax and spending debate in this election could be illuminating and informative instead.

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