Tony Blair will ignore the siren voices of Old Labour calling for higher income taxes

Labour will fight the election on a promise to keep income tax rates unchanged and a lid on NI contributions

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Writing a New Labour election manifesto is easy. The first line is: "We will not raise the basic or top rates of income tax." That's what it said last time and the time before. It's negative. It's uninspiring. The party doesn't like it. But everyone knows that it has to be in there. It is the next bit that is harder, the main aim of the exercise being to avoid putting in promises like "We would never dream of bringing in tuition fees. Ever." But the tax bit is easy.

Writing a New Labour election manifesto is easy. The first line is: "We will not raise the basic or top rates of income tax." That's what it said last time and the time before. It's negative. It's uninspiring. The party doesn't like it. But everyone knows that it has to be in there. It is the next bit that is harder, the main aim of the exercise being to avoid putting in promises like "We would never dream of bringing in tuition fees. Ever." But the tax bit is easy.

No surprise, then, that the newspapers reported last week that the income-tax promise would be repeated at the coming election. In Downing Street, work on the Labour manifesto barely paused over the summer. The battles within the Government over it are the big half-hidden story of politics at the moment. And the ground on tax was cleared at the National Policy Forum in Coventry in July, which approved a statement that said - loosely translated - "The policy on tax is whatever Tony and Gordon say it is."

It is a little late, therefore, for the think-tanks of the Labour establishment, the Fabian Society and the Institute for Public Policy Research (IPPR), to publish their proposals for higher taxes on the better-off. This is not just a case of bad timing, but of bad politics. At the very moment that the Labour Party is becoming restive about what it regards as the self-imposed bit, bridle and blinkers of tax policy, Labour's tax policy for the election is likely to become even more restricted than before.

This is a prediction, not a snippet of inside information. The policy mechanics working on the manifesto do not like talking about it. But I predict that Labour will fight the next election on a promise not just to keep income tax rates unchanged but to keep the lid on National Insurance contributions too. In effect, Tony Blair and Gordon Brown will promise not to increase any form of tax on income.

At the last election, they got away with keeping their options on National Insurance open. Having cut the basic rate of income tax from 23p in the pound to 22p in 2000, they promised not to raise it or the top 40p-in-the-pound rate. But Gordon Brown said nothing about National Insurance. Hardly anyone noticed, and Brown took advantage of the leeway to raise NI contributions last year by 1 percentage point across the board. What was significant was that the 1 per cent applied to all earnings above the "ceiling", currently £31,720 a year, as well as below it.

This was hailed in some quarters as the breaking of the taboo of progressive taxation and the first step towards socialist nirvana. The siren voices of Old Labour were surprised and delighted that a tax rise to pay for the health service turned out to be popular, and argued that this ought to embolden Brown and Blair to go further.

The reason why this modestly egalitarian tax rise means so much to the Labour Party is because it is still traumatised, more than a decade later, by John Smith's shadow budget in March 1992. Smith, as Shadow Chancellor, proposed to get rid of the anomaly by which National Insurance contributions were deducted up to a certain level of earnings, but not increased above that level.

To someone of Smith's Labour vintage, it was a perfectly moderate and fair reform. The vast majority would be better off, and only the best-off tenth of the population would have to pay more. But they would have had to pay a lot more, and the Conservatives aggressively exploited fears that a high-spending Labour Government would hit people much lower down the income scale. Above all, as Bryan Gould, later a hero of the left, put it after Labour lost the 1992 election, the plan was seen as a "cap on aspirations".

That is why even Old Labourites - and the Liberal Democrats - are more cautious now, restricting their demand to a new 50p tax rate on incomes over £100,000 a year. Gordon Brown is said to have argued with Blair for such a policy before the 1997 election. I have always doubted whether he pressed very hard, or whether he would have adopted such a policy had he been the Labour leader. The fact that Blair risked a joke, telling Brown's adviser Ed Balls to "wash your mouth out" for raising such a possibility at a private meeting of the three to decide tax policy in January 1997, suggests that it was not a serious option.

It is not an option at all now, which is why the Fabian Society's renewed call for it this week seems pointless. If the Fabians want to raise taxes on higher incomes, they should focus their argument on raising National Insurance contributions at the top end of the scale. But I suspect that they would be wasting their time on that too. Blair and Brown would be right to rule out that option. One reason they got away with leaving the NI loophole open last time was because the Conservative Party was in such disarray. Now, Michael Howard and Oliver Letwin, the Shadow Chancellor, are better placed to deny them wriggle room.

Firstly, this is because the Tory sums add up this time, which they did not under William Hague and Michael Portillo. But secondly, it is because, despite the success of last year's rise in NI contributions, the national mood on tax has not shifted as much as the wishful thinkers of the left imagine. The mass-market newspapers are full of stories of the intolerable burden on home owners of council tax, stamp duty and inheritance tax. (They are also full of stories of the appalling effects of house-price inflation, which is contradictory because lower property taxes mean higher prices, but never mind.)

I predict, therefore, that Blair will pay no attention to the Fabian Society's plea for a higher top rate of income tax, or to the IPPR's suggestion of higher inheritance tax on larger estates. He explained why during the last election campaign: "It may warm the cockles of some political activists if you go after the very wealthy, but I think it is a misplaced use of political energy. Even if you were to do it, the benefits you might yield in terms of any more could be outweighed by the signals you would send out and the time you would spend trying to do it."

I believe he is right. Last year's rise in National Insurance contributions was certainly important. But it was an opportunistic advance, not a turning of the tide. If the Conservatives have any strategic judgement, they will harry Blair and Brown for a promise not to increase National Insurance contributions further.

They may well succeed. The thinking of both Blair and Brown on this question is still heavily influenced by their experience as junior members of John Smith's shadow Treasury team. And Blair feels more vulnerable than ever to a Conservative Party promising to match Labour spending on the NHS and schools, but squeeze elsewhere, which allows it credibly to promise (slightly) lower taxes. The New Labour way is to redistribute by stealth, and Blair and Brown have been good at it, without recourse to noticeably more progressive taxes on income.

That is the way it will continue to be.

j.rentoul@independent.co.uk

The writer is chief political commentator of 'The Independent on Sunday'

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