- The Observer,
- Sunday August 12 2001
Ministers must start openly arguing this autumn for higher taxation to fund improvements, rather than trying to 'fool' voters with obscure 'stealth' taxes or pretending there is no choice to be made, the report warns.
Faced with voters who want better public services but may not be prepared to pay more for them, Labour 'has been raising taxes and is now increasing spending rapidly while still claiming that this does not amount to old-fashioned tax and spend', adds the Institute for Public Policy Research (IPPR).
But this tactic cannot be maintained for much longer. 'Tax policy cannot proceed on the basis that you can fool most of the people most of the time,' the IPPR says.
The explosive findings, along with warnings of an economic slowdown, will put further pressure on Chancellor Gordon Brown. It will also be seized on by opposition parties, who will be keen to exploit suggestions that Labour has been less than transparent so far. But Labour backbenchers and trades unions will use the report to argue for an open return to redistribution and an honest debate about tax.
'It is difficult to see how any Labour politician could avoid the conclusion that to maintain the level of growth in public investment we have now got is going to require an increase in taxation,' said Matthew Taylor, the director of the IPPR and Labour's former head of policy. 'What Labour cannot afford to do is to be in a situation where towards the end of this second term they radically reduce the level of spending on public investment.'
The report - which is by the IPPR's respected economist Peter Robinson, and which will be published before Labour's party conference - makes its uncompromising predictions without accounting for recession.
But a slump would further increase pressure on the Chancellor as bumper revenues from growth in the first term, which have so far underpinned the Government's plans, dry up. Last week manufacturing officially entered recession, while the Bank of England indicated that growth would not meet Brown's targets.
Blair has promised not to raise income taxes, a pledge Downing Street regards as unbreakable. But voters have become far more sensitive to stealth taxes than in 1997.
The IPPR calculates that Brown's 'war chest' will slip into deficit by 2004. If public spending is to keep pace with demands for Labour to deliver on schools and hospitals it must increase by £14 billion, or 4p on standard income tax. Further heavy borrowing would be 'imprudent,' the report says.
The crunch will come during next summer's Comprehensive Spending Review, when Brown sets his post-2003 funding plans.
'The commitment not to raise taxes was always based on political expediency rather than economic reality,' said John Edmonds, leader of the GMB union. 'However, the Government must realise that people do not want to see public services undermined to pay for tax cuts.'
The Liberal Democrat's shadow chief secretary to the Treasury, Ed Davey, backed the warning, saying Labour would be 'forced to raise taxes, probably steathily, in order to maintain anything near what their spending rate is now in 2002 to 2004'.
The IPPR report calculates that Blair's stated target of matching the EU average in health spending by 2006 would take another seven years of above-inflation rises.
The Government's aim to abolish child poverty by 2020 could cost about £17bn, while tackling pensioner poverty and rises in income support could add £12bn to pensions spending up to 2050. 'This appears to reverse the Government's stated aim of reducing the share of public expenditure on pensions as a proportion of GDP,' the report notes.
Robinson dismisses as 'highly imprudent' the Chancellor's argument that productivity increases could deliver spending pledges without having to raise taxes.
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