Andrew Grice: Tax rise is a repudiation of New Labour

Peter Mandelson, one of New Labour's architects, memorably said that it was "intensely relaxed about people getting filthy rich". Yesterday, after the Cabinet was briefed on Alistair Darling's plan to raise the top rate of income tax for people earning £150,000 a year, Lord Mandelson told the meeting: "In the sweep of history, this will not be seen as the tectonic plates shifting."

Nevertheless, the surprise move is a pivotal moment. For years, tax was such a toxic issue for New Labour that anyone daring to raise it in public was sent to the party's equivalent of Siberia.

Yesterday's surprise announcement that Labour will raise the top rate from 40p to 45p in the pound if it wins the next election marks a sea change for New Labour. Only a few months ago, when some ministers suggested privately that high earners should pay more tax, one Blairite cabinet member told me it would be "electoral suicide".

What's changed? A lot, ministers say. The looming recession has knocked such a black hole in the Government's coffers that it had to start saying how it would fill it. The banking bailout and City bonuses mean the public will probably welcome fat cats paying their "fair share" at a time when the whole nation has to make sacrifices.

Every Labour manifesto since 1997 has reiterated the party's pledge not to raise the basic or top tax rates. But Brown allies insisted that New Labour's fundamental tenet was never about specific rates, but economic stability. "Circumstances have changed, so the policies must too," one said.

Lord Mandelson, the Business Secretary, told yesterday's cabinet session that the mini-Budget fulfils New Labour's four key principles: markets where possible, governments where necessary; boldness; fairness and ensuring the country lived within its means.

Mr Brown, Lord Mandelson and Tony Blair were scarred by the 1992 election, when John Smith's Labour published a "shadow Budget" proposing tax rises to fund an increase in child benefit and pensions that damaged the party's prospects.

But the debate over the top rate was always more nuanced. Mr Brown, then shadow Chancellor, favoured a 50p top rate on incomes over £100,000 in the run-up to the 1997 election, but the plan was vetoed by Mr Blair. Few Labour folk expected Mr Brown to revisit it. As Chancellor, he argued that a 50p rate was not worth the candle.

Chancellor Brown pursued "redistribution by stealth", channelling money to the working poor through his complex tax credits. But in 2002, he raised national insurance payments by 1 per cent to boost the health budget. It proved popular – although the public mood has reversed since.

The tax U-turn will be welcomed by many Labour MPs. The left-winger Jon Cruddas said: "This should be the first stage in rebalancing the tax system so it's fairer for middle and low-income earners, as well as kick-starting the economy in the short term."

The move poses an acute dilemma for David Cameron, who wants to make Labour's temporary tax cuts permanent but will look as though he is defending the rich if he opposes higher taxes for top earners.

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