Leading Article: Stand firm against tax cuts

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The Independent Online
As chancellors go, Kenneth Clarke has been a good one. So far. In difficult political times he has held his nerve and stuck to a strategy to restrain inflation and deliver sustainable growth. But yesterday's speech suggests that he may be about to risk his reputation in pursuit of short-term political gain.

Paradoxically, the absence of a feel-good factor has helped the economy to grow without inflation taking off. A static housing market, combined with hefty tax increases, have kept consumer spending subdued.

However, yesterday's unexpected jump in the underlying inflation figures, from 2.9 per cent to 3.1 per cent, shows the continuing fragility of our current non-inflationary growth. And given the risk that higher inflationary expectations may feed through to future wage rises and price rises, the Chancellor needs to proceed with caution, both on taxes and on interest rates.

However, such caution is not an attractive counsel when you are drifting to electoral defeat. The party craves a tax cut here, an interest rate cut there, and a boost for the housing market thrown in for good measure.

Mr Clarke should stand firm and not deliver. An interest rate cut when inflation is moving upwards faster than expected would be too risky. A tax cut funded by borrowing would only add to the inflationary pressures. A package for the housing market would also distort the fiscal regime and make it harder to deliver worthwhile reductions in the tax burden when they can be afforded.

The Chancellor's big problem is that growth is running slightly lower than expected, so there is no bonus from higher tax receipts - or lower spending on unemployment - to redistribute. That, of course, leaves a tax cut funded by spending cuts as Mr Clarke's only way forward.

Yet no one who heard him yesterday can doubt that he intends to unveil what he will call a tax-cutting Budget next month. By that he may well mean the sort of tax cuts we have had in the past 15 years - namely, not tax cuts at all but a re-juggling of the tax burden.

It is an entirely legitimate aim of a Tory government to pursue a genuinely lower overall tax take - something like the 35 per cent we had in the Sixties, rather than the 40 per cent-plus of the Eighties and Nineties. But this, even if desirable, could not be achieved by sleight of hand; it is only possible if the state's expenditure is radically recast, perhaps along the lines that were suggested this week by Norman Lamont.

Mr Clarke has never been this kind of radical. He cares too much about the NHS and the social security system. Which leaves only unsustainable tax cuts and gimmicks.

His likeliest budget trick is to promise a programme of falling taxes stretching over several years - to be funded by future and implausible spending cuts. This might be smart politics in that it would help interrogate Labour's hazy thinking on tax. But make no mistake, it would be a gimmick. We will probably be lucky if we get through the election with no folly greater than this.