Don't blame the war for tax rises

Anthony Hilton12 April 2012
Last night's speech by the Chancellor was designed to soften us up for tax rises. City Editor Anthony Hilton says we shouldn't believe this has anything to do with Afghanistan - it's to pay for Labour's public spending splurge at home

When he deliered his keynote address to the Labour Party conference last month, Chancellor of the Exchequer Gordon Brown barely mentioned tax. Yet the following morning every national newspaper reported that he was hinting that taxes should rise. In fact he did no such thing but his spin masters briefed the political journalists - who find all this economics just too dull for words - that this was the coded message. They fell for it, and the headlines were the result. Thus Brown gets the tax hike message onto the public agenda and softens up the voters to expect tax increases. But because he never actually said anything on the subject himself, he can't be pinned down in Parliament and his freedom for manoeuvre is in no way constrained.

In this way he can not only avoid being a hostage to fortune but he can score political points both ways. If taxes have to go up he can say he warned us about it months ago. If taxes don't have to go up he can go on about how his prudence and good housekeeping have triumphed again.

A similar softening up was in evidence yesterday before his latest big speech, delivered last night to the business lobby group the CBI in Birmingham, but extensively trailed in the Sunday papers so it was read by most of the nation over their cornflakes. The pattern was similar. There was no mention of tax rises but the seed was planted. This time "a close adviser to Tony Blair" did the business - telling us taxes will have to rise to pay for the Afghan war, and indeed going further. The suggestion was that Brown will increase National Insurance charges in next spring's budget but defer their implementation for 12 months - a great way to slip through a tax rise.

This may or may not happen, but the fact is that there is no way taxes need to go up to pay for the war. War, this kind of war at any rate, comes pretty cheap. There are no attacks on our homeland and so far we have fired only a couple of Tomahawk missiles in anger - both of which were so old they should have been fully depreciated. The cost of operations to date is significantly less than the constant lowlevel military activity which would be ridiculed if called into play to justify a tax hike. The RAF, for example has been bombing Iraq weekly for 10 years to enforce the nofly zones, a legacy of the unfinished business at the end of the Gulf War. Closer to home, the Army till recently was heavily committed to the policing operation in Northern Ireland. At no time has it been suggested that taxes should rise to pay for these operations.

So what is going on? The defence budget is puny these days compared to that of the Cold War period. Today we spend on health two, three and potentially four times what we spend on fighting wars. Even if the Afghan war turned out to be massively expensive and the military budget had to increase by 50 per cent to accommodate it, it would still be less than the cost of the spending and education programmes promised by the Chancellor. So if the Government is seriously trying to persuade us that this military campaign justifies a tax rise then it can only be because it wants to stop us looking for the real reason. It suggests it wants to patch over a black hole elsewhere, and think that it can do so by blaming it on the war.

That black hole, potentially is the Government's implied promise to spend what it takes to sort out the public services, and the big issue today is the same as it was before 11 September. Where will the money come from? The Gover nment has promised massive increases in health and education, and while it can afford these for a couple of years while the economy remains buoyant, it cannot afford them indefinitely.

The Institute of Fiscal Studies did the sums and predicted that taxes would have to rise if government sought to maintain the promised levels of increased spending throughout this Parliament - and it made that prediction before the terrorist attacks turned the odds on a global economic slowdown from the merely likely to a racing certainty, bringing a new threat to the government's finances.

Economic growth is the key because when the economy grows, tax revenues grow fastest of all. No one gets richer faster than the taxman. This year Brown will rake in about £400 billion in tax revenue against the £270 billion which Ken Clarke stood to collect in his last year as John Major's Tory Chancellor. Stealth taxes account for a small part of this increase but the bulk of it has just come naturally with the taxman taking his usual slice from a very much bigger pie. The Chancellor's great hope as he projects his spending into the future is that this kind of windfall will come his way again and again. If his slice keeps getting larger because the cake is growing, he can increase his spending ferociously, without having to increase tax rates. He can still claim to be prudent when in fact he is as profligate as they come.

This has been the key to Brown's success to date, preaching prudence while spending madly. The threat now is that the top three economies in the world are all in trouble. America is in recession and shows no sign of a quick recovery, Japan is in recession and for 10 years has been gripped by 1930sstyle deflation. Germany is crippled by the massive continuing cost of rebuilding East Germany. That leaves only Britain among the top four economies with any real prospects for job creation and expansion - and ours incestuously depends on the hike in spending.

The question the Chancellor and his advisers agonise over is therefore simple. Will those major overseas economies with which we trade recover before they drag us down to their level? If they do, then there should be enough growth to see the Chancellor through and allow him to keep his promises. But if their recessions are prolonged, we too will ultimately hit the buffers. If that happens everything will start to unravel. Unemployment will rise, tax revenues will drop in spite of rate rises, spending plans will have to be abandoned, and this Chancellor's career will end like so many of his predecessors - in failure.

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