Higher taxes to pay for NHS

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Pre-Budget statement: Today's full news and comment links

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The Chancellor, Gordon Brown, launched a campaign yesterday to forge a national consensus in Britain for a huge increase in spending on the National Health Service financed by a rise in taxes for the middle classes.

In a defining moment for the Blair Government, the Chancellor and the Prime Minister have decided to gamble that they can persuade the middle classes to pay more in tax to ensure Britain gets the better public services they want to see.

Presenting his pre-Budget report, Mr Brown committed Labour to maintaining a taxpayer-funded health service which remains free at the point of use, after a review of the long-term pressures on the NHS, carried out for the Treasury by Derek Wanless, a former chief executive of Nat West.

Mr Brown announced a one-off extra £1bn for the NHS for the financial year starting next April and promised the health budget would win "a significantly higher share of national income" when the Government agrees a new three-year spending programme next summer.

The Chancellor also gave a big boost to Britain's pensioners, announcing that the basic state pension would rise by at least 2.5 per cent each year, even if inflation was lower, to prevent a repeat of last year's paltry 75p-a-week increase. He also unveiled a £2bn-a-year "pension credit" from 2003 which will top up state handouts to people with small occupational pensions or modest savings which give them an income of less than £135 a week.

Ministers described the draft Budget as the final nail in the coffin of the Thatcherite era of tax cuts. Mr Brown said: "The way we make these decisions – whether we can forge a new consensus across parties and across Britain – will determine not only the long-term future of the health service but the character of our country."

Calling for a national debate on the issue, he said he believed a consensus could be built around Mr Wanless's conclusions that a publicly-funded health service was best for Britain and that it would need "significantly greater capacity and significantly more long-term investment".

Mr Brown's aides made it clear that Labour would honour its general election pledge to avoid an increase in the basic and top rates of income tax during this parliament. A rise in national insurance contributions for the better-off, and other so-called "stealth taxes", are the Government's most likely route but the scope for raising revenue may be limited. In the long term, a rise in income tax may be needed.

But the new strategy is a huge political risk, especially as any tax rises might start to kick in during the run-up to the next general election. The former cabinet minister Peter Mandelson said he believed the public would "make the personal financial sacrifices that may be needed in future to bring public services up to the standard they demand". He said "the great middle classes" would have to pay more – either through tax or by going private. If they went for the private option, Britain would be a divided society which still had poor public services.

However, it was immediately clear that Mr Brown's hopes of achieving an all-party consensus for higher taxes would not win the support of the Tories.

Michael Howard, the shadow Chancellor, said it was a "black day" for health care because Mr Brown had set his face against fundamental reform. "It is clear to everyone except Gordon Brown that more money will not deliver the results the people of this country are entitled to expect," he said.

Mr Brown, who said he was "cautiously optimistic" about the economy, left City analysts bewildered as he forecast strong economic growth but a sudden and sharp plunge into the red for the public finances.

The Chancellor said the economy would grow by between 2 and 2.5 per cent next year, putting him in conflict with global institutions such as the International Monetary Fund and the Organisation of Economic Co-operation and Development, which expect just 1.7 per cent.

Simon Rubinsohn, chief economist at Gerrard, a City stockbroker, said it was "questionable" whether the UK could really grow as fast as Mr Brown predicted. "Even 1.7 per cent would be stretching it a bit in my view," he said.

But despite the ambitious growth forecast, the Chancellor again surprised analysts by increasing his forecasts for public borrowing by almost £25bn over the next five years.

Economists said the Chancellor was probably repeating his trick of pencilling in an excessively gloomy figure that he could later show he had exceeded. Mark Cliffe, at ING Barings, said: "If the Treasury's bullish view on growth is borne out, its caution on revenue may again prove excessive."