The Week in Politics: Tories back in game but Brown has best cards

On big set-piece occasions, Gordon Brown likes to pull a rabbit out of his hat, something that the pundits have not predicted and that has been guarded as a state secret by his media-savvy aides.

It might be a bonus for pensioners or a rise in health or schools spending. But when the Chancellor delivers his eighth Budget next Wednesday, he may resist the temptation to conjure a headline-grabbing announcement. For once, he will be happy if the commentators judge it a boring Budget. While the mantra in 10 Downing Street is Basil Fawlty's "Don't mention the war", in No 11 they are desperate to avoid another three-letter word: tax. Mr Brown's priority next week will be to avoid giving ammunition to the Tory campaign warning of "Labour's third term tax rises". The Tory attack is plausible. People know their taxes have risen and are not convinced it has been worth it. Mr Brown boldly raised national insurance to pour more money into the National Health Service. His stealth taxes may have reached their political limit, though there could be a few bomblets hidden in the Budget's small print. For example, he could raise billions by not raising tax allowances and thresholds with inflation.

Chancellors normally trumpet higher spending ahead of an election, but Mr Brown will appear unusually parsimonious. He will set a tough ceiling for the three-year spending plan to be issued in July to answer the charge that there is a "black hole" needing to be filled by higher taxes or borrowing.

The Iraq war has dominated British politics for a year. But I suspect the Budget will mark a shift back to the domestic issues that will dominate a long run-up to a general election in May next year. There is little mileage for Labour or the Tories in banging on about Iraq; the Tories cannot exploit Tony Blair's biggest weakness because they backed the war. So the election will be fought on the traditional battleground of the economy, tax and spending.

Who will win it? Lord Saatchi, Tory co-chairman, gave a remarkably upbeat forecast to the party faithful at a meeting last weekend. "It is now possible not only to see how we will win the next election but it is hard to see how we will lose," he said, citing opinion polls showing the Tories ahead on economic competence and tax.

But Labour strategists believe the public is willing to pay tax for good public services and that Labour can win the economic argument even if it takes a hit on tax. One senior Downing Street aide told me: "People's sense of economic well-being is made up of three main components: employment and general prosperity, interest rates - particularly housing costs - and taxation. When you are losing on two out of the three, people start to turn against you."

Ministers admit they have to convince people they have not raised taxes recklessly. This explains Mr Brown's determination to root out Whitehall waste, a big theme next week. On Monday the Treasury will publish a review by Sir Michael Lyons which proposes to move more than 20,000 civil servants out of London. On Wednesday Mr Brown will trail the findings of an efficiency review by Sir Peter Gershon which has identified £15bn of savings. It was no accident that the Gershon findings were leaked on the day that Oliver Letwin, the shadow Chancellor, made an important speech outlining his strategy on spending. Mr Brown believes the Gershon report will spike the Tories' guns by showing that Labour has already reallocated savings to frontline services. Mr Letwin thinks otherwise; he believes the Gershon review will blunt Labour's attack on the £18bn of cuts over two years implied by his spending plans.

The choice for the voters, according to Mr Letwin, will be between how fast spending should increase. The two main parties have converged significantly on the tax and spend issue, a tribute to the way Mr Blair and Mr Brown have changed the terms of political trade. The Tories intend to match Labour on health and education and even spend more to implement reforms. They are not yet making a specific pledge of tax cuts, though I think they will do so early next year. Even then, the tax cuts will be aimed atthe bottom of the income scale.

The parties will exaggerate the differences between them. Labour will scream about the horrifying consequences of £18bn of "Tory cuts", while the Tories will try to again run their "tax bombshell" campaign of 1992. The truth is that the dividing lines between the parties will be narrower than they admit.

Who will benefit most? My hunch is that it will suit Mr Brown more than Mr Letwin. Unless the Tories can carve out a distinctive, popular and simple message on the economy, the voters may stick with Labour, however grudgingly. Indeed, a poll on which party is most trusted to manage the economy this week showed Labour 10 points ahead. If Mr Brown can convince people that he has not abandoned prudence, he will be able to reap rewards of his sound economic management since 1997. The Tories are back in the game, but it is the Chancellor who still holds most of the cards.

a.grice@independent.co.uk