Modern Westminster is mesmerised by the fact that the Conservatives won the last general election after Norman Lamont created a lower income tax rate of 20 per cent, while Labour lost it after John Smith said he would force middle earners to pay more. It seems that Labour's new leadership, haunted by this experience as much as John Major is sustained by it, has it in mind to reduce the next election to an auction, in which each side goes to ever more unrealistic lengths to depict itself as the party of low taxation. Can this have anything to do with sound economic management? The answer is no. Cuts in the overall burden of taxation will be no more sustainable following the next election than they proved to be after the last. As in the mid-1980s, economic recovery will create the illusion of room for manoeuvre by reducing government borrowing more rapidly than the Treasury's published forecasts now suggest. It is conceivable that by the time of a pre-election Budget, public borrowing will be pounds 6bn lower than the Treasury currently forecasts, enough to pay for a 3p cut in the basic rate. But such a cut would be folly, for in the economy as a whole nothing will really have changed. Britain will still be consuming and importing too much, and exporting and investing too little. Unless a tax cut is accompanied by drastic public spending cuts - not something Mr Blair will find attractive - the old pattern will repeat itself: more money; more spending; more imports. Instead of expending our resources on rebuilding the country's industrial base, we will be laying open the economy to resurgent inflation and ever more anaemic rates of growth.
Labour's problem is that the Government will almost certainly cut taxes anyway, not least because Eddie George, the Governor of the Bank of England, will not allow the Chancellor to bribe the voters with lower interest rates. So how can Labour compete? Mr Blair's associates have already flown some kites. Most amount to sleight of hand - raising cash in the more obscure corners of the tax system to finance cuts in the basic rate. Some options Mr Blair is considering are sensible, such as the removal of the remaining tax relief on mortgage interest payments, although that raises less than pounds 4bn. Cutting the pounds 9bn tax relief for pension contributions is a less realistic idea, as people would then be paying tax both on what they put into their pensions and what they get out. Mr Blair is also reported to be contemplating a specially earmarked 'health tax', which would be unwise. The experience of poll tax and VAT on fuel demonstrates that imposing new taxes is even more unpopular, and more hazardous in political terms, than increasing old ones.
Mr Blair , should he become Prime Minister, will not be able to reduce the overall burden of taxation, and he should accept now that pummelling the tax system into delivering a 15p basic rate is much too ambitious. Honesty is Mr Blair's best policy. Sooner or later the electorate, much though it may resent the pimply minions, will have to accept that income tax is here to stay, and that cuts for the mass of the public would be illusory, reckless or paid for with even more unpopular measures like VAT on fuel. It may be a strategy fraught with electoral risk, but Labour should stay out of the snake-oil market.Reuse content