Hamish McRae: When times are tough, you spend less. Why should it be any different for a government?

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The Independent Online

The Government is frightened of fuel protests. The blockade of the depots in September 2000 was the only serious civil protest it faced in its first term of office. It cost the country an estimated £1bn and led to the NHS being put on "red alert". For a very brief moment the Tories took the lead in the opinion polls. It also led to a huge amount of detailed planning by a task force chaired by Jack Straw on how to cope should that happen again.

While the Government did not offer explicit concessions, it subsequently abandoned the fuel escalator, whereby there were automatic above-inflation increases in fuel duty – a practice inherited from the Tory government.

The experience was a big lesson for Gordon Brown. It was the first occasion, at a time when the Government was fundamentally popular, that he had been forced to change tax policy. He does not himself drive, and his antennae had not picked up the way people react to fuel tax. People who have to fill up a car feel differently from those who don't.

Now however the problem is wider. The general level of taxation is somewhat higher – though not as high as many people think – and there is less inclination to give the Government the benefit of the doubt over its motives.

For example, are "green taxes" really about the environment or are they simply another way of squeezing out more revenue? The extra burden from higher road tax duty is a case in point. You can see why Labour backbenchers are running scared.

So what is to be done?

The reaction of most people, to judge by the polls, would be to wait for the democratic process to change the Government, and maybe on the way, its leader. But whether or not that turns out to be right, there is I think a credible way forward for the present government to respond, which would be consistent with its long-term objectives.

It might not win an election, but it would be the right thing to do. It is, in essence, what all companies have to do when under pressure: to comb through all their activities, their revenues as well as their costs, and see how they could do things better.

Start with a specific example. One of the difficulties the Government has over fuel and vehicle duty is that it appears to be insensitive to real people's concerns. Remember that the Revenue does well out of higher fuel prices, partly because of North Sea company taxation, though that is very complicated, and partly because part of the price we pay for fuel is VAT. So the higher the price of the fuel at the pumps the higher the tax take. There is a windfall gain.

Now it would not be difficult to fine-tune the tax system so that any additional revenue over and above a certain point was used to offset additional fuel costs. The proposition would be: we cannot do anything about the world oil price but we are not in the business of making extra revenue out of your discomfort.

There would be no prattling on about EU carbon targets or global climate change, which are separate longer-term issues. Nor, conversely, would the Government be trying to offset the climbing oil price by offering a subsidy. It would simply be a reassurance that the Government was not using high oil prices as cover for an increase in taxation.

This is similar to the way any wise commercial company would deal with a sense that it was not being quite fair to its customers when it had to raise prices. It would offer some sort of guarantee that additional funds were not being squirreled away to pay for some past errors and that when the price of the inputs came back down the customers would get the benefit.

That is the specific suggestion; now the more general one. It is quite hard now to remember the early years of Gordon Brown's chancellorship, the years when he really was prudent and when public spending was under tight control. With hindsight he probably squeezed down public spending too much in those years, actually cutting investment plans that had been made by the Tories and exacerbating transport and other problems later.

But his fundamental aim, to use public money cautiously, so that funds could be directed to the highest priority issues, was surely right. Somewhere along the way, this objective was lost. The rhetoric remained but the actuality became detached.

It is still to early to know quite why the huge increase in public spending that took place during his second and third terms of office, far larger than that of any other major economy, has produced such disappointing results. I suspect a lot of the problem has to do with the speed at which additional funds were fed into the system. When great wodges of new money hit any organisation these tend to be wasted. This happens to companies – and indeed to individuals – as much as to government departments. Then when tougher times hit, you comb through every item of cost and try and figure out how to do more with less.

That is what the Government has to do now. As it happens it has, far too late, started to do so. But there has not for several years, actually since the years of the first Blair/Brown government, been a culture of parsimony. In those first few years ministers would come forward and proudly present to the Treasury more and more ingenious ways to save money. The Treasury had to say: no, don't squeeze too hard or there will be problems later.

So what the Government needs to do is to recapture some of that ethos of its early years: that it can govern efficiently and well rather than simply throw money at problems. Then the money it saves can be used to hold down the deficit – or , cautiously and when justified, be feed back into the economy with tax cuts.

A Labour government that makes tax cuts, huh? Well actually Gordon Brown himself was very aware of the need to get overall tax rates down, hence his mismanaged move to two income tax bands, 20 per cent and 40 per cent, an objective originally set out by Nigel Lawson.

As for the drive to improve public sector productivity, his last two budgets had explicit targets for improved efficiency built into them. It was assumed that productivity would rise and this assumption enabled him to claim that the output of the public sector would carry on rising even though the years of large increases in spending were coming towards an end.

This isn't about ideology; it is about efficiency and it is about fairness. It is about efficiency because many people feel the Government is either wasting their money or at least spending it less carefully than they would themselves. During the long boom, that did not matter so much; now it matters hugely. And it is about fairness because seeing the Government rake in more revenue from higher fuel and vehicle licence fees just does not seem fair.

It is common sense, isn't it? Just about everybody now is having to look again at their spending. If it costs that much more to fill the tank, where is the saving going to come from? So why should the Government be different? Connecting with voters is not saying "we feel your pain". It is doing the same thing as they are doing: economising on their spending, figuring out how to get things done with less money.