Brown plans a budget worthy of his hero

Lloyd George's in 1909 laid the basis of national insurance. Brown's is also intended to have a defining role
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The Independent Online
David Lloyd George is a politician who has had more mixed reviews from historians than almost any of this century, is back in fashion. Kenneth Clarke put a cartoon of him on his Christmas cards last year. And Gordon Brown, word has seeped out, regards Chancellor Lloyd George as something of a role model.

That is not all that surprising, given first that he was a fellow Celt, and secondly that there is a distinct shortage of alternatives in Labour's own pantheon. Philip Snowden, class traitor par excellence does not do. Stafford Cripps, is, well, too austere. Hugh Gaitskell might be a good if unexciting candidate but the name still has a slightly divisive ring about it. Jim Callaghan had the disaster of devaluation and Denis Healey, however kindly history may judge him, is still widely perceived as having some of the blood of Labour's 1979 defeat on his hands.

But there are positive, as well as negative, reasons for favouring the Welsh wizard. The radical 1909 budget defined the purpose of the Asquith government by having a long reach and laying the basis of the modern national insurance system. Next week's budget, the first Labour one for 18 years, will surely be designed to have at least some of that defining role: it is easy, because we have known about it for so long, to be bored with the idea of a windfall tax to fund work for the unemployed. Easy, but a mistake. The levy on the privatised utilities may be a gamble, though not so much in the raising as in the spending. As a one-off the Government cannot afford to make mistakes about how it is used. But it is a bold step, not tried in any other country and earmarked for a clear social purpose. All the bolder since there are increasing signs that it will yield significantly more than the pledged pounds 3bn, quite possibly significantly more than pounds 5bn. And if it does, then it could well generate welfare-to- work programmes beyond those already publicly identified. Helping to get single mothers back to work perhaps? The one certainty is that the tax on utilities is popular. The focus groups which Labour is using in power as it did in opposition would accept a very high figure indeed.

So the Budget would be a big deal even if that were all it was doing. But it will not be. As with the 1909 budget, the beginnings of welfare reform will be at the heart of it. But it will also have three other big themes: long-term stability, long-term investment, and fairness.

Stability is a matter of fiscal as well as monetary policy. Spending ministers like Frank Dobson at Health, already hoping for a lion's share of the pounds 2.5bn contingency reserve, do not need to be told how serious Brown is about the spending part of the equation. Indeed given the optimism about Britain's fast-shrinking deficit some may wonder why they are being asked to wear a hair shirt at all. But Brown has always believed that the fatal tendency of past Labour governments has been to spend first, hurt later. The manifesto was adamant about banishing Labour's tax and spend past - a historic shift of which Brown, as much as Blair, was the architect in opposition. Indeed Brown badly wants to cut the lowest rate of tax to 10p, an aspiration which he will certainly reaffirm on Wednesday, though enactment could wait until the task force under Martin Taylor of Barclays Bank has completed its study of the tax and benefit systems. And the party's leadership, from the Prime Minister down, has been almost as consistent in attacking the borrowing levels generated by the previous government as it has been in ruling out increases in income tax.

Which means that Brown will raise revenue, probably quite a lot of it. Some calculations are that the net increases could be pounds 4bn-pounds 5bn excluding those from the windfall tax. Most, if not all of those taxes, will serve purposes implicit in the Budget's other themes. Green taxes like raising the price of petrol, and even extra duties on tobacco and drink have to be carefully imposed to be fair: they affect the poor most. If they did not Brown would not be pledged to reducing VAT on fuel to 5 per cent. But if, as seems a near certainty, Brown cuts dividend tax credits, yielding a probable pounds 3bn, he will be able to argue that that is a measure, at least in the long term, for investment. Dire predictions of a stock market collapse after the proposal was floated have not been realised. And companies releasing less cash in dividends should have more to plough back into the business.

That does not mean that the Government has not faced a serious dilemma. On the one hand the Treasury case for increasing personal taxes would normally be strong. With more than pounds 25bn of building society windfall cash flushing through the economy, because of an unusual one-off restructuring of the lending industry, you could argue this is a highly appropriate time for raising personal taxation, whether on incomes, or through higher VAT, on consumption. Consumer booms mean inflation, because increased demand increases prices. And inflationary pressures which are not checked with tax increases have to be checked with higher interest rates.

On the other, Tony Blair's jealous guardianship of the manifesto has meant that anything which breaks the cast-iron pledges not to increase income tax, or to extend the VAT base, is taboo. Never mind that Treasury officials, or the CBI, may be clamouring for across-the-board increases, including ones on personal tax. Just imagine William Hague standing up next Wednesday and being able to say, "We told you so. You've done just what we said you would do. You lied in the manifesto." Brown does not want, will not allow, that speech to be made - or at least to be made with any credibility.

Nevertheless, he is determined to be prudent. And the manifesto, as he himself pointed out in well reported speeches before the general election, leaves the Government quite a lot of room. What is more, as Brown certainly knows, one of the previous government's most signal failures, perhaps what got it into most trouble in the late 1980s, was the failure to deal with the impact of City deregulation and the credit boom in 1986-7. The huge windfall from the building societies could pose some similar dangers. Those who say confidently they know just what further changes - like scrapping mortgage interest tax relief or reducing some allowances - will be made should be treated with serious caution. And there will be no tax increase that cannot be explained in terms of the Government's main purpose. But this is a Chancellor for the long term - a radical who wants to be responsible.