Andrew Grice: The moment that finally cost Labour the general election

What next for Labour? A 70p top tax rate in the pre-Budget report this autumn?
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The Independent Online

Before the Budget, some Labour MPs clung to the hope that a general election fought on a straight choice between Gordon Brown and David Cameron on the economy might yet deliver a hung parliament with Labour as the largest party.

True, left-wing MPs have a spring in their step after Alistair Darling's announcement of their long-cherished 50p income tax rate.

And yes, the first post-Budget polls suggest the move is popular, reflecting the new anti-rich mood in the Britain of "Fred the Shred".

Despite hostile headlines about the 50p rate in most newspapers, only 1 per cent of taxpayers earn more than £150,000 a year and will pay it from April. Only 2 per cent earn more than £100,000 and will see their tax allowances squeezed. No doubt the 50p rate played well when Labour road-tested it in private polling.

And yet most Labour MPs seem pretty gloomy this weekend. They don't see how their party can win, given the scale of the economic mess laid bare by Mr Darling.

Rarely has a Budget gone off the rails so quickly. Thirty-seven minutes after the Chancellor sat down on Wednesday, the International Monetary Fund (IMF) issued a more pessimistic forecast than his own. The next day, the Institute for Fiscal Studies (IFS) pointed out a £45bn black hole in his plans. Yesterday, official figures suggested the contraction in the economy may be bigger than the 3.5 per cent he had predicted. So even Mr Darling's horrendous £175bn public borrowing forecast for this year may prove optimistic.

Blairites in the Cabinet defend the 50p tax rate on the grounds of fairness. But those on the back benches fear it will provide only a brief shot in the arm, inflicting long-term damage by telling voters lower down the income scale that Labour is against wealth creation and against those who aspire to move up the ladder.

After Tony Blair blocked Mr Brown's attempts to include a 50p top rate in Labour's 1997 election manifesto, Brownites acknowledged it might not have been worth the candle, since many of the rich would find a way to avoid paying it. Now the IFS raises the same doubts, saying the move may not bring in any money. It is largely symbolic.

Mr Darling seemed to acknowledge the Labour doubts by hinting that the new top rate might be withdrawn in better economic times. In which case, he should have said so in his Budget, not in a media interview.

The political debate is already moving from tax to spending, thanks again to the stark IFS report on the cuts that will be needed to the fill the hole in the public finances. How to limit state spending is now the main event in politics, not tax.

"Efficiency savings" promised by Labour will provide only a drop in the bucket. Real savings, probably by scrapping major projects such as national identity cards, the Trident nuclear missiles system and new aircraft carriers, will be required. The Chancellor could have made a start this week. He missed an opportunity to shape the crucial debate.

Instead, Mr Brown is fighting the last war, or perhaps the only battle he knows – Labour investment versus Tory cuts. Yes, it has served his party very well at the last two elections. That was because the Tories were foolish enough to play his game. They are not now.

Mr Brown surely hoped the Opposition would promise to reverse the 50p tax rate so he could brand the Tories the "party of the rich". Similarly, he would love them to translate their preference for lower spending over higher tax into a handy hit list of health and education cuts.

Mr Cameron is refusing to play. Shrewdly, he and George Osborne say their priority is to halt the 0.5 per cent rise in national insurance contributions due in 2011, hitting everyone earning more than £20,000 a year.

The Prime Minister's strategy was too obvious for its own good. "The 50p tax rate was an elephant trap that a blind fool would have sidestepped," was how one senior MP described it to me. And he is Labour.

Now the Tories try to turn the tables on Labour over tax and spending. They have relaunched their tax bombshell, with more help from the IFS, which says that every family faces a £2,840 bill from the credit crunch. Some Labour folk fear that Tories, already committed to scrapping ID cards, could identify other "big bucks" savings to show how the Government can tighten its belt, leaving Labour with an agenda of painful post-election cuts.

"Investment versus cuts" worked in the age of plenty. It won't necessarily work in the age of austerity, when voters look to the Government to share their pain. Savings may prove more popular than investment that people may feel the country cannot afford.

No amount of challenges by Labour to come clean will persuade the Tory leadership to write a "shadow Budget". The doubts about the real state of the nation's finances, already exposed in the few days since the Budget, have reinforced Mr Cameron in his belief that it would be irresponsible to spell out an A-Z of policy until he knows just how bad his party's inheritance would be.

Labour will cry foul, and there will come a time when the media turns a powerful spotlight on the government-in-waiting and demands to know more about what it would do. Mr Cameron knows this moment will come. He intends to say more about his policy intentions at the Tory conference this autumn. But he is not going to hand Mr Brown the ammunition he seems to be banking on.

What's next from Labour? A 70p top tax rate in the pre-Budget report this autumn? And if that doesn't produce a Tory pledge to repeal it, how about a Denis Healey-style 83p in the eve-of-election Budget next March? Even then, I doubt Mr Cameron would blink.

Economics and politics may now work in the Tories' favour. Worryingly for Labour, I don't think the public see Mr Cameron as a man ready to take an axe to schools and hospitals. He may be inexperienced on the economy but he has learnt from the errors of his predecessors.

Although he does not take victory for granted, Mr Cameron now feels vindicated over his decision not to match Labour's spending plans. The horror of the state we are in is revealed, and it is difficult to see how any government could defy political gravity by winning an election in such circumstances. I suspect we will look back on this week as the one in which Labour lost the election.

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