Donald Macintyre: Mr Brown has a taxing question to ask the nation

'Are we reaching the end of an era in which increases in income tax are virtually taboo?'
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Gordon Brown's pre-budget statement in the Commons today may prove a turning point in the history of New Labour, if not the history of political economy since 1979. Those who only have an appetite for the soap opera of British politics had better stop reading here. For the reason has absolutely nothing to do with the all too well publicised past tensions between the Chancellor and Prime Minister. It has everything to do with a question rather more relevant to the voting public, that of taxation in a modern social democracy

Let's deal with the short term first. The fears about the combination of a global downturn and spending on the war against terrorism have been exaggerated. No doubt the Chancellor will revise downwards his forecasts for economic growth, though, according to the OECD, UK growth is still likely to be the highest in the EU. But in any case, thanks to his cannny stewardship of the public finances, it is pretty clear that with a limited increase in borrowing which does not undermine his "golden rule" about not increasing borrowing other than for investment over the cycle, he can respond to this without cutting spending or raising taxes. What's more, he still has room for extra help for business, an extension of tax credits, and quite possibly some other flourish which will take us all by surprise.

So far so normal. You would hardly expect a Chancellor at the peak of his proven powers suddenly to be deserted by them because the going got a little rougher. But what will make today's statement especially interesting, perhaps even historic, concerns two longer-term and closely related developments. The first is the publication of the interim report the Chancellor himself commissioned from Derek Wanless, the former chief Executive of NatWest seeking to foresee the increase in demands on the NHS over the next 10 to 20 years. And the second is his intention, already signalled by the Treasury, to open up a debate on whether we need increased taxes to pay for health, education and transport over a similar period.

Even though it was foreshadowed in the 2000 budget, well before the last election, the Health Department was initially suspicious of the Wanless operation, fearing a coup by a Treasury notoriously sceptical about the NHS's capacity to spend money wisely. It has, by all accounts, warmed to it on the grounds that it will underline a funding gap, and one which it turns out the Chancellor has no wish to hide. For in one sense, the Wanless report will tell us what we already know: that we are going to have to spend a lot more money if we want a world-class health service. How could this not be when we are spending, despite the impressive increases since 1997, 6.8 per cent of GDP compared with 10.3 per cent in Germany and 8.7 per cent in the Netherlands? But the fact that it is out there, with the official imprimatur of the Treasury, gives the issue a sharpness and focus it has not hitherto had.

Wanless, at least at this stage, will be silent on how the funding should be found. But the Chancellor is resolute in believing that the current system of funding the health service through taxation is the right one. In this he is not indulging in old Labour romanticism; after all, Nigel Lawson believed strongly that a state-funded NHS delivered the best value for money, which was one of the reasons he resisted – with partial success – the attempts by Margaret Thatcher's acolytes to foist on him the task of stimulating the use of private health insurance through tax breaks. There are many interesting questions about the future of the NHS, including its use of private provision of (free) health care, where appropriate, and, even more important, the freedom of patients to exercise choice. But this isn't dependent on changing the funding system. The NHS needs reform as well as resources. But to change the funding system may divert from, rather than enhance, that process of reform, by introducing a whole new layer of change – and one which is neither socially just nor necessarily cost effective. As the Chancellor likes to point out, the French are moving back towards a tax-funded system.

But because Mr Brown (rightly) takes this view, there are consequences which it does not look as if he intends to duck today. And that is that you need to pay for it through taxation. Like many of the questions that Mr Brown thinks a lot about, this is long term. However, it also (partly) a short-to-medium one since decisions on spending over the next three financial years – and therefore how to pay for it – will have to be taken next spring.

He is unlikely to pre-judge this debate today. Should there, for example, be – something the Treasury has traditionally resisted but which ministers like Charles Clarke and Alan Milburn favour – a hypothecated health tax, partly to deal with the suspicion of taxpayers that generalised taxation disappears into a deep black hole labelled "government"? But, in a sense, this lively debate ignores a more basic point. Which is whether we are reaching the end of an era – dating, in effect, from Mrs Thatcher's arrival, and prolonged by the Blair-Brown pledges in 1997 and 2001 – in which increases in income tax are virtually taboo?

Of course there are difficult questions here; when last year the Fabian Society Commission on tax urged a rethink of that taboo, it pointed out that people were much more willing to pay higher tax when they were confident their money was well spent. Mr Clarke's commendably frank admission that parts of the NHS are in worse shape than when Labour came to power is a reminder of how difficult this will be. Equally, it is part of a necessary process of downscaling the exaggerated expectation raised at the time of the NHS plan last year of how quickly the health service could be fixed.

But that may be where Wanless can help. By underlining the scale of the problem it may make people think a little more deeply if they are paying enough tax to secure the health service they want. And there are three reasons why so called indirect or "stealth" taxes may not be the right way to levy that taxation. The first is that they have been largely "found out" (as the Fabian Commission opinion research established); the second is that indirect taxes, whether stealthy or not, are not progressive and, thirdly, the Treasury is beginning to run out of stealth taxes.

As it happens, the Treasury could increase income tax even in this Parliament without breaking its pledge not to raise rates – either by the judicious non-indexation of allowances or by raising National Insurance – or at least its ceilings. This is an increase in the direct taxation which Mr Blair has – for most of his premiership – been to keen avoid. But its time may have come. There will be many voices raised against it. But Mr Brown, both by commissioning Wanless and starting his "debate" on taxation, has asked an admirably grown-up question. The answer, if we want world-class public services, should and perhaps will be that the present era of ever-lower income tax has now come to a natural end.