Sleight of hand from a would-be Chancellor

Has Gordon Brown the magic recipe: a foolproof fiscal plan to help the poor?
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The Independent Online
Has Gordon Brown discovered the fiscal equivalent of the perpetual motion machine? No increase in standard income tax. No widening of the VAT base. No new top rate of tax. No increase in spending. But a better, fairer world.

Or have he and Tony Blair fallen into the trap that ensnared, disastrously, Hugh Gaitskell and his then shadow chancellor Harold Wilson during the 1959 election campaign?

Then, as now, the economy was improving. Then, as now, the Tories were exhorting the electorate: "Don't let Labour ruin it." And then, as Gordon Brown did yesterday, Gaitskell promised no increase in income tax. All those wonderful aspirations Labour had, including a hefty increase in the old age pension, would be paid for out of economic growth.

When Aneurin Bevan was told about Gaitskell's campaign speech promising no increase in income tax during "peacetime", he said brutally - and correctly - that "He's thrown it away. He's lost the election." The voters couldn't square the circle; they couldn't believe Gaitskell's "nobody gets hurt" theory of politics. The Tories won by 101 seats.

Brown's speech yesterday is at once the replacement for, and the antithesis of, the shadow budget which John Smith was forced by the party's huge spending commitments on pensions and child benefit to introduce before the last election. It is the final expression of Brown's disengagement of his party, not just from those commitments, but from the assumptions that underlay them. There will be no more news on tax from Labour between now and polling day. And even if it doesn't invite the same answer, it poses the same questions that Gaitskell's fatal 1959 speech did: is it believable, and, if it is, what is Labour offering that makes it worth voting for?

It's true that those with the highest hopes now riding on the windfall tax have inflated its value to pounds 10bn. That's an impressive sum to spend on bringing hope to a generation threatened with permanent exclusion from the world of work. But the windfall tax isn't just controversial and of uncertain yield. It's a one-off. The money, once spent, is gone. Tax cuts, including a new starting rate for the poor of 10p in the pound, are supposed to be for ever. A state education system to be proud of will take years to rebuild. An NHS that promises to be more, in the next century, than something from which everyone who can afford to, flees, will need more than the sacking of a few hundred adminstrators to flourish.

Brown knows this; which is one reason why his announcement yesterday, though not without its risks, doesn't fall apart in the way that Gaitskell's did. The markets, relentlessly heat-seeking, would not, as he also knows, allow a Labour Chancellor to sustain the bogus equation on tax and spending of which his critics - Liberal Democrat as well as Tory - accused him yesterday. But neither is Brown envisaging a world in which nothing changes, in which Labour has no pretensions beyond being more efficient managers of the market economy than the Conservatives.

It's important to consider, first, what Brown did not rule out, as well as what he did. In promising two years of keeping within the present spending totals, and precluding increases in income tax for the entire parliament, he has certainly imposed unprecedented constraints on an incoming Labour government. But he refused a blanket pledge to keep "more than 200" tax exemption reliefs, and allowances embedded into the revenue system. In theory, and at the most ludicrously extreme, he could abolish Mortgage Interest Tax Relief, reduce personal allowances, tax child benefit for higher rate payers, and reduce reliefs for private pensions, without breaching the terms of yesterday's speech. To do all of that at once would scarcely be sustainable for a Labour government seeking a second term. But he has left some room for redistribution through taxes and/or to raise revenue if dire economic circumstances impel it to be done. As they may well do, whoever wins the election.

What he can't now do in the first two years is use even that form of increased taxation to finance extra spending (though it isn't precluded after that). The real message of yesterday's speech is that Brown has learnt the hard lesson of previous Labour governments which have rushed to fulfil expensive spending commitments, only to pay for them later, usually with their lives. By imposing the discipline, he sought to reverse the process by ensuring that ministers, instead of fighting for their share of a spending increase, will be forced to search collectively and individually for savings to pay for cherished programmes. And some of these will be naturally easier after an election than before. No Labour politician, for example, dares breathe even a word about defence savings before polling day. Welfare reform remains the favoured source of new funds. But expect the promised Defence Review to be an early priority.

Brown knows it is not going to be easy. If maintaining discipline on spending in opposition has been tough, imagine how much harder it will be in government, when each spending minister, impatient for results, is bolstered by powerful civil servants who regard victory in a public expenditure round as the only reliable symbol of departmental virility. And when the public sector unions' expectations of a Labour government are all the keener after 18 years of increasingly depleted power. Brown had already sought to reassure the markets on borrowing. In outlining his tax and spending plans he has set himself a daunting, and, for a Labour Chancellor, unprecedented task. But it was no conjuring trick.