Ministers think the Tories won the taxation argument in 1997 and 2001. But - phew! - Labour has won it now


Gordon Brown's Budgets are the big political events of this government. They set the framework for all domestic policy-making in a way that even Nigel Lawson never achieved at the height of his powers in the mid-1980s. For this Chancellor to stand at the despatch box and say in a self- deprecating way that his intention is simply to add a touch of lubrication to an economic engine best left to regulate itself would be as surprising as Tony and Cherie opening their wallets to pay for a holiday.

But even by Brown's standards, Budget number six, due on Wednesday, will be important. Partly that is because there has been so little coherence to swathes of policy-making since the general election. Approaches to rail, health and education have all given confused and contradictory messages, the fuzziness being mainly around the boundaries between state and private sector in the provision of public services. The Budget will be an opportunity to draw a few lines.

But the particular importance of this Budget is that direct taxes are likely to go up. All those pent-up emotions about redistribution - on both wings of the political spectrum - will suddenly find release.

In spite of all the "enterprise" rhetoric (and some action) since 1997, there has been more redistribution through the tax system, primarily from the working rich to the working poor, than the Chancellor and the Prime Minister wanted to shout about. Brown's assorted tax credits, combined with the abolition of related tax allowances, have boosted those on the lowest incomes and increased the tax take from middle-income earners. Somewhat oddly, people at the fringes of society - those excluded from normal social discourse by either extreme poverty or extreme wealth - have been more or less untouched by his fiscal engineering.

Indeed, the surprise is that the egregiously wealthy are not making bigger donations to Labour funds, because Brown's capital gains reforms have made some of them gazillions better off. Directors of socially useful investment banks and accountancy firms with big shareholdings in their firms are among the beneficiaries. Brown has shown less compassion to those below the poverty line who are unable to achieve redemption through work.

All this mucking around with credits and allowances was in part the result of a self-imposed prohibition on transparent increases in direct personal taxation. This prohibition is about to end. I am told by those licensed to speak for Blair and Brown that "we [the government] have won the argument on taxes".

The notion of winning this argument would be amusing if it were not slightly tragic. It is redolent of an autism that pervades British politics, a detachment from reality, an inability to see the world except through the prism of focus groups. Common sense would suggest that the argument on taxes was won in the 1997 and 2001 landslide Labour victories. But that has not been the view in 10 and 11 Downing Street. Their occupants have been persuaded that the mandate on personal taxation policy was won by the Tories in those elections.

So the Treasury has had to waste time and money commissioning a report from a former banker, Derek Wanless, which has produced the unsurprising conclusion that the NHS requires lots more cash. Senior members of this government have kept a straight face while telling me that the Wanless research has provided the crucial moral and intellectual underpinning for an increase in direct taxes.

Part of my objection to all this is that it misses the point. A sensible debate about the health service would not be about where funding comes from, or even about how much is needed. It would be about structure, management and the pernicious, institutionalised moonlighting by consultants. A far-sighted government would abandon the impossible challenge of organising a vast national operation from the centre and would break up the NHS.

However, there is also a small problem for Blair and Brown in winning this tax argument. If it makes sense to increase direct taxation, then the most fair, honest and efficient way of doing this would be to increase the top and/or basic rates of income tax. But doing any of that was explicitly ruled out in Labour's general election manifesto. I suspect, therefore, that Brown will instead increase the take from employees' national insurance contributions in some way, probably by increasing or abolishing the ceiling on payments. That would be the most progressive of the reforms available. But the burden would once again fall disproportionately on middle-income earners. Mondeo man might begin to wonder, understandably, what Blair and Brown have got against him.

One interesting implication of increasing the de facto tax burden on this group is that it might do something to damp down house price inflation, take the edge off consumer spending and allow the Bank of England to make further cuts in interest rates. If you were a Eurosceptic conspiracy theorist, you would note that this would narrow the differential between UK and eurozone interest rates, thus placating the pro-euro group of multinational companies.

But I suspect that the government will find it increasingly difficult to avoid outright conflict with much of British industry. Business people are finding it harder to suppress an atavistic conviction that Labour is about interference, regulation and taxation.

Brown believes that social justice and economic growth are two sides of the same coin. That view will face its toughest test in the coming weeks.

Robert Peston is editorial director of QUESTTM;; e-mail