Steve Richards: Mr Brown may want to spend. But he's still nervous about tax

Osama bin Laden can claim indirect responsibility for a minor miracle. Since the atrocities of 11 September, the mad and maddening debate in Britain about "tax and spend" has become slightly less hysterical. It is almost in danger of becoming sensible.

Protected by the cloak of war, Tony Blair and Gordon Brown dare to hint at the need for tax rises. Even more remarkably, the Shadow Chancellor, Michael Howard, sings a similar tune. The briefings before Mr Howard's speech at the Conservative Party conference suggested that the tax-cutting era had passed. Journalists listening to the spin in Blackpool had to head for a darkened room in a state of considerable shock.

That is nothing compared with the reaction of some on the centre left. They can hardly contain themselves as they contemplate the new political situation. The general secretary of the Fabian Society, Michael Jacobs, who has been boldly putting the case for tax rises for several years, is almost over-excited (it is against the law and a contradiction in terms to actually BE an over-excited Fabian). Not so long ago the Fabian Society produced a weighty report arguing for an earmarked health tax. Ministers affected an indifference at the time. Now Mr Jacobs senses that tax rises, including a health tax, are no longer a political taboo.

There is some cause for the near excitement, partly because there is not enough money to pay for Mr Brown's spending plans. The Government has made the investment and reform of public services the defining theme of the second term. In such a climate it cannot cut spending and therefore has to contemplate tax rises.

Almost as potent, several senior ministers support the idea of a health tax. These include the Health Secretary, Alan Milburn, and the Labour chairman, Charles Clarke, who restated his support in an interview in this newspaper last July. If they are not persuasive, perhaps Mr bin Laden will do the trick. You can almost hear Gordon Brown make the case during his Budget: "In the light on the continuing war on terrorism, and the demands the war is making on government spending, it is both prudent and necessary to introduce a new, fair People's Tax, a tax for hospitals, for better and more doctors ..."

You can almost hear him say it – but I doubt if he ever will. The Treasury remains firmly opposed to earmarked taxes, as does Tony Blair. They already have enough rigid constraints placed on them as to how they spend our money. Without wishing to dampen the near excitement of the Fabian Society, I wonder, also, how great their appetite is for making the broader case for higher taxes.

Some of the Gordon Brown entourage were far from pleased that the media interpreted his party conference speech as a hint that tax rises were on the way. Mr Blair's words on the subject have been no different from those he uttered during that cautiously soporific election campaign in June: "If there is a choice between tax cuts and investment we will stick with our plans to increase investment." Both of them have avoided raising the more painful juxtaposition: tax increases to avoid cuts in existing spending plans.

The Conservatives are still trying to have it both ways. In his conference speech Mr Howard spent half the time attacking Labour's tax increases, implying that he would reverse every single one of them. Only the briefings afterwards suggested that Mr Howard had moved on to new terrain. As the former head of research at Conservative Central Office, Daniel Finkelstein, put it on The Week in Westminster yesterday, the Conservatives will probably go into the next election saying that tax cuts are "an aspiration" rather than a firm pledge. In other words they will be less foolishly precise about their plans while still hoping to win votes by speaking the language of tax cuts.

The tax-and-spend debate has shifted over the past nine years, but it has not shifted that much, certainly not enough to give Mr Brown the confidence to raise taxes – and therefore spending – to European levels. Personally I am in favour of earmarked taxes. They meet the requirement of a good soundbite coined by Paddy Ashdown: "There should be no taxation without explanation." A health tax would give us some sense of where our money was going. It addresses the desperate presentational problems in Britain where voters demand better services without wanting to pay for them.

But if Mr Brown will not listen to Mr Milburn or Mr Clarke (he has never listened to Mr Ashdown), he certainly won't listen to me. So what can be done? On a modest level there will have to be some tax increases and a degree of transparency about what the Government is doing. This will be a welcome novelty and one that is unavoidable in the current economic climate. But I have another modest proposal which would be a "no lose" one for the Government: it should let councils raise more cash through local taxation.

Last week's unexpected decision by several towns to introduce mayors is a positive development. Significantly the only areas to vote No were Brighton and Sedgefield, where the Yes campaign suffered from being seen as too Blairite. This suggests that voters want some form of robust local independence from central government.

The mayoral innovation is a good one, replacing the anonymous mediocrities who run most councils with figures who, because of their prominence, will inevitably be more accountable. Indeed, the Government should have had the courage to impose the structure on all big councils rather than allow local referendums that can turn on the fleeting mood of a few people who bother to cast their votes. This is a government that becomes conveniently pluralist if it senses that a policy might not be universally popular.

Part of the solution to Britain's appalling public services is a revival of local institutions, including the introduction of mayors across the country. In order to revive councils they need to be free to raise money. If they raise money at a local level, the Chancellor will have to raise a little less centrally. Politically this is a benign sequence for the Government. As a bonus it can be instigated even if the "war on terrorism" ceases to provide a cover for increases in national taxation.

The devolution of financial power is a tax-raising measure safely unrelated to the activities of Osama bin Laden – unless he resurfaces as the new Mayor of Lewisham. In which case, at least we would all know where he is.