A wicked way for Labour to turn the tax tables

THERE is little doubt that by the next election the British economy will be in better shape. Labour may reasonably point out - as Robin Cook, its trade and industry spokesman, did yesterday - that the promised post-election recovery has so far failed to materialise. But while it may take more months to secure reasonable economic growth, it is virtually inconceivable that in three or four years' time the economy will still be depressed.

So while there are several good reasons to suspect that the recovery will be slow, the overwhelming probability is that by the next general election people in jobs will feel richer and there will be fewer out of work.

Even with slow growth, unemployment should be falling in four years' time, for purely demographic reasons. In 1977 the total number of births was the lowest since the Second World War. This plunge in the birth-rate, coupled with a higher proportion of teenagers staying in further education, is already reducing the number of entrants to the job market.

For John Smith and Gordon Brown, who must devise a credible economic strategy for Labour, the prospect of recovery creates a grave political problem. Perhaps some global economic catastrophe will unseat the Tories, but the only sensible assumption is that Labour will have to fight an election at a time when most of the country is better off. The line this week, that everything is dreadful, simply will not be believed.

To avoid a fifth election defeat, Mr Smith and Mr Brown must propose an alternative vision of how to manage a relatively successful economy. They must also explain how that vision can be realised without pushing up tax rates, the issue which probably cost Labour the last election.

That is a hard task, but not an impossible one. It may be difficult for Mr Smith and Mr Brown to embrace, rooted as they are in the Scottish socialist tradition of using public spending to attack social and economic problems. But within the Labour movement there is a nucleus of ideas which could be pulled together over the next two years into a coherent and attractive set of economic policies. They fall into three broad groups.

The first is much greater use of the state as a regulator and setter of standards, rather than a provider of services. There are several areas where regulation could and should be tightened: in financial services both the Lloyd's insurance market and the occupational pensions industry need attention; pollution standards could and should be improved.

But the purpose would not just be to tighten regulation; rather it would be to use improved regulation as a partial substitute for taxpayers' money. For example, if the Government wanted to improve pensions, the most cost-effective way might be to promote better personal pension schemes and monitor the results very closely. Politically, that would certainly be more attractive than using large amounts of taxpayers' money to make small across-the-board increases in state pensions.

This leads to the second group of ideas, concerned with targeting social benefits. Labour finds this issue particularly difficult, because it runs counter to its post-war commitment to a universal system. But the pressures for targeting - to get better social value for any particular outlay - are enormous, not just in Britain but throughout the industrial world.

As Bill Morris, leader of the Transport and General Workers' Union, pointed out recently in the New Statesman, the two-income, two-car family does not need to be offered the same state benefits as the very poor. The present system of benefits was designed for a more cohesive society than we now have: as society fragments so the benefits system needs to be redesigned.

One candidate for redesign is unemployment benefit, for Britain is unusual both for its low levels of benefit and the fact that they continue indefinitely. Higher benefits, and more money for retraining, could be financed by stopping unemployment benefit after a particular period, as other European countries do. This ought to reduce the numbers on the dole by pushing the long-term unemployed back into the labour force.

If it were possible to get better value from the pounds 65bn Britain spends on social security, perhaps Labour need not remain the party of high taxation. And even if overall tax levels remained the same, it might be possible for a radical Labour government to refine the tax system in a way which the Tories would find difficult.

Taxation reform would be the third plank of Labour's new economic platform. Frank Field, the MP for Birkenhead, advocates eliminating tax loopholes and using the money to cut tax rates. He argues that ending mortgage tax relief would enable a cut in the standard rate of income tax to 18p in the pound. It would be possible to raise new revenues from taxes that benefited the environment and use the money to reduce income tax rates still further. Socialist France, for instance, has a much higher petrol duty than Conservative Britain.

Indeed the really radical, not to say politically wicked, idea would be to use a little revenue from much higher environmental taxation to cut the top marginal rate of income tax from 40p to, say, 38p. It would cost very little, but be quite devastating to the Tories' electoral positioning.

It would also conflict with the Labour tradition that regards high taxation as a necessary price for achieving desirable social objectives. But the lesson of Mr Smith's shadow budget, which Labour has to learn, is that high taxes are exactly what voters do not want.

By choosing the person who framed that vote-losing budget as its leader, it has been suggested that Labour prefers to stick to its traditions than to win elections. But paradoxically, because John Smith is rooted in that tradition and is widely trusted, he may be better placed to break Labour free than Bryan Gould, who was perceived, perhaps unfairly, as a southern yuppie. We know that Mr Smith has a formidable intellect; the question is whether he has the courage to think the unthinkable.