This fuel crisis has revealed the limit of a government's tax powers

'Part of the problem is the suspicion that much of our taxes disappears into a black hole'
Click to follow

However the fuel crisis ends, one overriding lesson will remain: we are now close to the practical limits of the taxing power of a British government. That lesson will haunt not just this government, but its successors for the next 20 years or more.

However the fuel crisis ends, one overriding lesson will remain: we are now close to the practical limits of the taxing power of a British government. That lesson will haunt not just this government, but its successors for the next 20 years or more.

Governments have always assumed that in extremis they can increase taxation. In wartime they can, but in peacetime it is much harder to do so. Still, even in peacetime they reckon that they can, at the cost of being unpopular, crank more money out of the tax system. They also know they will be unpopular if they do not give adequate funding to public services. So they are faced with a balancing act. How do they maintain or increase taxation without people noticing too much, and how, at the same time, do they ensure that taxpayers feel that they are getting value for money?

Up to now, this government has been particularly adept at this game. Taxes have risen markedly over the past three years, but many such rises have slipped by almost unnoticed. For example, the pension funds have been severely hit, but people will discover that only when they retire on a smaller pension than they would otherwise have received. As for public spending, well, past underfunding can be blamed on the previous government, and this one received a boost to its popularity when Gordon Brown announced his sharp rise in spending in the Budget.

But governments can tax only by consent. Now, quite suddenly, that consent has been withdrawn as far as fuel tax is concerned. It has been withdrawn not just in Britain, but across much of northern Europe. That is of seismic significance for two reasons.

First, fuel tax was the one tax on spending that governments thought people could not avoid. We can stock up on booze in Calais or even drink less of the stuff. We can smoke less. If VAT were to go up, we could even cut our spending a bit. However, we do have to travel, and businesses do have to move goods around. So demand for fuel is, as economists might say, inelastic: it doesn't change much when the price goes up or down. The motorist is trapped. And, in a democracy, when people feel trapped they get angry - hence the widespread support for the blockade.

The second significance is that this protest has happened in good times. Sure, fuel prices have hit many people, but overall living standards have been rising steadily for eight years. As the Prime Minister noted on Tuesday, the UK is now the world's fourth biggest economy, thanks to this strong growth. (We passed France, albeit only by a whisker, last year.) The good times have in general helped the Government's popularity ratings. If people can suddenly get grumpy after years of boom, how might they react in a recession, or even in a period of slower growth?

Is there a quick fix? Could the Government rebalance its tax system to cut indirect taxes (particularly on fuel) and maybe boost direct taxes (particularly income tax) instead? In theory, it is certainly possible. We have lower personal tax than most other EU countries. Why not go up a bit closer to their levels?

There are three arguments against that. One is that, while our income tax rates are low by EU standards, they are, for most people, higher than in the US, our closest competitor in the new industries. The second is that EU tax rates are coming down toward ours: both France and Germany have announced tax-cutting packages this summer. And the third is that one of the reasons why our economy has overtaken those of Italy and France is that we have had a tax advantage over them. Human capital flows to places where it gets the highest returns; hence the flood of talented people from the rest of the EU into Britain. As Gordon Brown pointed out yesterday, we benefit greatly from our relatively low tax rates on working people. That is one of the reasons why employment is so high by EU standards. Of the big economies, only the US has a higher proportion of people in work.

In the short term, governments can always fiddle about with the tax system. It would be perfectly possible to cut fuel duty and make up the difference by taxing something else. The Chancellor could even use a bit of his surplus if he felt so inclined. But people need to know that their money is being well spent, and I believe that part of the Government's problem is the suspicion that much of our taxes disappears into a black hole.

Whatever happens to our tax system now - and I would expect that sooner or later fuel duty will have to be cut - the Government has to convince people that public spending can give at least as good value for money as private spending.

As a start, it should try to create a culture of parsimony. It should not spend, for example, on lavish new offices for MPs or fancy wallpaper for its Lord Chancellor. When it does waste money - on the Dome, for example - it would be much wiser to apologise rather than to try to brazen it out. The Prime Minister would be wise to use regular airlines for his family holiday, as did the Chancellor before his honeymoon.

It is not wholly fair, but the Government has allowed a certain "noses in the trough" smell to develop about it. The impression that there is one set of rules for the government and another for the rest of us erodes support for public spending as a whole. The fact that it didn't see this protest coming shows how unaware it has become of the effect that gliding around in ministerial limos has on ordinary people.

But the problem goes far beyond image, and far beyond the UK. It is a problem for governments everywhere, particularly in the EU but also in Japan; and I expect that within a few years it will become a problem in the US as well. The problem is: how, in a world of rising demand for better public services in health, education and welfare, do you give taxpayers confidence that they are getting value for their money? Older societies need more public spending, and there will be fewer workers to foot the bill. If a government such as ours cannot square that circle in good times, what will things be like in the less good ones that will inevitably come?