Leading Article: Who feeds the wolf?

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'AND where will the money come from?' Down the political generations, this is the question that Tory politicians, and their cheerleaders in the press, have asked the Labour Party when it made election manifesto spending promises. At the last general election, Labour told us the money would come from increased taxes and National Insurance contributions and John Smith, then the Shadow Chancellor, explained who would pay exactly what. The electorate did not like the look of it, and voted Tory. But the Tories had made promises, too. Child benefit would be paid as now; there would be no change in the old-age pension; spending on the National Health Service would, in real terms, remain the same. It was also Tory policy not to increase the basic rate of income tax.

Where, then, would the money come from? From a public sector borrowing requirement that has galloped out of control is the first answer. The budget deficit is heading for pounds 50bn this year - 8 per cent of national income. That imposes an intolerable burden on future generations. The Government must, therefore, cut spending or increase revenue, or both. An economic recovery - if it was strong enough - would help close the gap by reducing the need to pay unemployment benefit and increasing tax yield. But not by enough. We cannot, in Michael Portillo's curious phrase, keep spending money at present levels on our 'favourite services'. 'Nothing is ruled out of court,' he told us last week.

What seem most firmly ruled into court are taxes and cuts that hit the old, the poor and the sick: more prescription charges; payments for hospital beds; cuts in invalidity benefit. Mr Portillo should pay closer attention to some of his own party's favourite areas of expenditure. Defence will still consume about 1 per cent more of national income in Britain than in other European countries, except France, even after the present planned cuts. (Labour leaders ought to be pressing this point hard, but the party's electorally disastrous commitment to unilateral nuclear disarmament a decade ago makes it fearful of seeming 'soft' on national security.) Free university education remains one of the most sacred of British cows. The beneficiaries are disproportionately from middle-class homes; most graduates will move into middle-class occupations, enjoying greatly enhanced earnings. They should pay for their own higher education, through a graduate tax. The use of roads is one of the few remaining areas of national life to which market criteria are not applied. Motorway tolls alone could raise pounds 2bn, with minimal effect on the old and the poor; road-pricing in big cities could raise still more. Mortgage interest tax relief is a distortion of the housing market which benefits mainly the middle classes. Abolishing it is, as we report on page one, apparently on the Government's agenda. It ought to be near the top.

Together, these cuts and charges, if accompanied by economic recovery, would bring the borrowing requirement close to acceptable levels without hitting the core services of the welfare state - social security payments and health and social services. But that does not mean that these areas, which together account for 44 per cent of public spending, can remain sacrosanct for ever. Schools and vocational training and investment in railways have a powerful case for extra resources. And if the welfare state continues in its present form it will claim an ever-greater share of national income.

The principles on which the welfare state operates have not changed significantly since its foundation half a century ago. Yet society has changed in ways that its architects never envisaged. In 1951, there were 700,000 old age pensioners, most of whom had only modest savings. Now there are 10 million: a growing proportion own their homes, draw occupational pensions and enjoy substantial income from stocks, shares and building society accounts. The automatic equation of old and poor no longer makes sense. It makes even less sense when millions of unemployed and millions of the working poor have to get by on benefit and income support levels that are among the meanest in Europe.

'Something has to give,' Mr Portillo said last week. It could be the 25p income tax rate; it could be the universal old-age pension or child benefit; it could be (again) the living standards of the poor. Mr Portillo should repeat his words at the next general election. And, next time, the Tories should tell us the truth: where will the money come from?