What Brown should budget for after the election

After 18 years in opposition, the urge to act will sit heavily on the shoulders of a New Labour government, if elected this summer. Yet history counsels caution, since several previous administrations have, in effect, blown their inheritance in the first few weeks of office.

Even now, it is possible to meet people, especially in the City, who see Messrs Blair and Brown as frontmen, and who expect a rapid lurch to the left should Labour win power. They point to the disastrous example of the victorious Wilson team in 1974, the most obvious example of a left- of-centre government attempting to implement an old-fashioned programme of "tax and spend". This quickly foundered, and Labour then spent years trying desperately, and unsuccessfully, to recover.

This comparison is quite ridiculous. New Labour has explicitly learned the lessons of Wilson in 1974. One of the key objectives since 1994 has not only been to jettison any vestige of "tax and spend" for the sake of winning the election, but also to keep expectations realistic for the first few years of government. Hence the Gordon Brown pledge to stick to the Tory spending plans for the first two years of government. If there does turn out to be a landslide on 1 May, it would be a very odd landslide, built on sober promises and low expectations. A negative mandate perhaps, but so much the better for avoiding early mistakes in office.

With a sudden lurch to the left completely ruled out, the early experiences of Harold Wilson in 1964 and Margaret Thatcher in 1979 may be more relevant for the present case than Wilson in 1974. When Wilson won the election of 1964, armed with a programme of genuine reform and hot air in roughly equal measure, he was met on the doorstep of No 10 - almost literally - by Treasury mandarins demanding action to correct the balance of payments crisis that had been allowed to mount in the last months of the Maudling chancellorship.

That very first weekend, Wilson, Callaghan and Brown were asked to choose between three options - devaluation of sterling, import quotas, or a temporary import surcharge. As Ben Pimlott writes in his biography of Wilson: "A decision of vital national importance could scarcely have been made under worse conditions: the decision takers barely out of an exhausting election campaign, with no recent experience of government. Not since 1945 had an incoming administration faced so severe a crisis. Then, however, the debate about financial arrangements had extended over a period of months. This time, there was a need for an instant decision."

Sadly, Wilson made the wrong decision, setting his face against devaluation and opting for an ineffective surcharge on imported goods. That instant decision, which Wilson never allowed to be properly reviewed by the cabinet, scuppered his administration's chance of economic success, and ensured that the eventual devaluation of November 1967 would be a bitter political defeat.

There is no such sterling crisis lying in wait for Mr Blair this time, but there is the question of EMU membership to deal with. If any question is likely to dog the next Labour administration, then this would be it, and there will be pressure for a decision as early as this summer. The lesson from the 1964-70 Labour government is to think long and hard before coming to a view, and then to ensure that the whole Cabinet is effectively locked into whatever course the prime minister chooses to follow.

A different example - Mrs Thatcher's victory in 1979 - is perhaps the most interesting, since it pertains to the live issue of what to include in Mr Brown's July Budget. Some outside economists are arguing that the fiscal stance needs to be tightened, and that it would be advisable for the new chancellor to bite this bullet immediately, whatever commitments have been given during the election campaign.

They cite the example of the campaign of 1979, when Geoffrey Howe talked of the need to switch the burden of tax between income tax and indirect tax, and of the need to control public spending and the public sector borrowing requirement (PSBR). But he specifically denied Labour claims that he had a secret plan to double the rate of VAT, and never suggested that he had any intention of raising interest rates.

Within six weeks of winning the election, the new chancellor introduced a June Budget which raised the basic rate of VAT from 8 per cent to 15 per cent (increasing the RPI by almost 4 per cent) and also hiked base rates from 12 per cent to 14 per cent. On the face of it, this was a poke in the eye for the electorate, yet the Howe Budget was not particularly unpopular, with the new chancellor winning a favourable approval rating of 38 per cent to 30 per cent in the polls. How was this possible?

It was possible because of the third main plank in the Howe strategy, a dramatic cut in income tax rates. The basic rate dropped from 33 per cent to 30 per cent, and the top rate from 83 per cent to 60 per cent. These income tax cuts more than offset the impact of the jump in VAT on take-home pay, which was roughly unchanged for the average family as a result of the Budget. So the 1979 Howe package, contrary to recent mythology, did not spring an unexpected tax increase on the electorate. Instead, it went for a more audacious version of the switch between direct and indirect taxation that had been promised during the campaign. It was therefore accepted by the electorate as an extension of what the Tories were promising, rather than a reversal of the spirit of their pledges.

It is difficult to be sure what the Treasury brief awaiting Messrs Blair and Brown on the doorsteps of Downing Street will say this time. Perhaps it will argue for an early tightening in fiscal policy, on the grounds that any increase in taxation becomes more difficult as the Parliament progresses. Some may even argue that enough loopholes have been left in the precise tax commitments made by New Labour to enable them quickly to raise the burden of tax, should this become necessary.

The alternative view would be that it is the spirit of the commitment on tax, and not the precise wording, that counts. New Labour is saying to the voters - trust us, we are different, we have no desire or apparent need to raise your taxes. Would they ever be forgiven for attempting to wriggle out of this commitment within weeks of the election, when nothing new had happened to justify the change? After all, the PSBR is improving relative to previous Treasury forecasts, and the demand management case for tighter fiscal policy can already be assessed on information publicly available before the election. The Treasury "books", in themselves largely a figment of political imagination, will contain nothing unexpected to justify such a risk.

Of course, a tax switch in the July Budget, enabling Mr Brown to introduce his 10p starting rate of income tax would be possible on the Howe model. But a significant rise in the overall burden of personal taxation? That would surely be an altogether different matter.

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