Chris Powell: How to get better public services without more tax

We've had it easy so far - fitness without leaving the couch or slimming with no change in diet

Although Gordon Brown can bridge the gap between government income and expenditure with public borrowing for now, even if he nearly has had to double his original estimate for this year, Labour urgently needs to search for more appealing ways to raise funds. The uncertain economic future and the chasm between current public service levels and the standards increasingly demanded will require more revenue than borrowing can responsibly provide.

The public is demanding big improvements in transport, schools and hospitals. It even tells pollsters that it is willing to pay for them, but history suggests that if times get hard, the public will resist rises in personal taxes. New ways to raise income will have to be found.

The scale of under-investment in the public services over decades needs sums even greater than this generous government has so far envisaged to provide a modern infrastructure of roads and railways, schools and hospitals and the manpower of doctors, nurses and teachers. More money than we've dared to think, because it's not just the incremental cost of the extra, trained, staff, but also the much increased wage bill necessary to hold on to those already there against the financial temptations of the private sector.

Despite the resources the Government is pumping in, it's going to take more to get to a level where the public will believe that good services have been "delivered", against constantly rising expectations. Uncongested roads, a timely rail service, a patient-focused NHS with little waiting, and world-class results from education will take more than reform, high single-figure annual expenditure growth and a few years to achieve.

The un-Labour-like promise not to raise income tax was a central plank of Labour's appeal in 1997. There was no attempt to raise "head on" personal taxes during its first parliament. Next spring's hike in national insurance will be the first tentative step to see if the electoral mood is really now for higher tax to pay for better services.

We've all had it easy so far. In effect, Labour has offered bigger spending and improved services at no apparent extra cost to the individual elector. A dream outcome: virtue at no personal expense. It is on a par with fitness without leaving the couch or slimming with no change in diet. Will voters be as content if they find themselves paying more in taxes when they start to feel a financial pinch ?

In a rising market of growing incomes and house values there may well be no problem. In a falling market, with overtime and bonuses cut, any higher tax would get the blame from taxpayers for feeling hard up and hard done by. Then the other seductive dream of lower taxes and fend for yourself might regain some of its lost attraction.

If the funds sufficient to deliver better services are to be forthcoming, as they must be for this Government to face re-election confidently, there needs to be some of the emphasis and imagination brought to the issue of raising more revenue that there has been to reforming the services themselves. Great efforts have gone into developing plans to modernise and improve the productivity of the public sector, but almost none to raising the money to pay for it all.

There are examples of non-tax solutions being discussed: student top-up fees in education, road pricing in transport and even payment for some fringe hotel services in hospitals. PFIs are being used extensively in infrastructure projects. On the whole, though, there is nothing like the same imagination brought to bear on finding ways people might be happier to pay than taxes as has been brought to finding new ways to configure the services themselves.

The argument for taxes is that they are an equitable, progressive, efficient way to raise funds. But if there are other ways that are just as equitable and progressive but more effective at encouraging greater payments, then surely these should be preferred, even if they are less efficient.

A year ago, Gordon Brown announced a great debate on funding the NHS. In the two seconds he allowed before closing the debate there were some murmurings that the Continental social insurance schemes might be worth a look. Not only might they be a route to extra revenue, but they might also be a tool to aid reform in the service.

Technology will shortly allow smart cards with details of our tax status (and medical records) encrypted. If these were used to access NHS services they could all be free to non-taxpayers and could have a sliding scale of charges, for certain services, reflecting the wealth of the user.

More environmentally friendly behaviour could be encouraged if car tax were replaced by a tax based on annual mileage; a switch to greater use of public transport should come from congestion charging, and rubbish collection could be based on price per bag as a disincentive to wasteful use. Necessary new road building can be financed from tolls and we will have some sort of contribution to higher education from those who benefit from the higher incomes they can command.

The public services have to be paid for. It makes sense to find ways to raise the money that cause the least resistance and allow behavioural aims to be achieved at the same time.

The writer chairs the Institute for Public Policy Research