Blair puts brake on further tax rises

Tony Blair has privately ruled out any more increases in direct tax, saying that last week's Budget was a one-off 'contract with the people' to rescue the health service.

In a clear indication that National Insurance would remain fixed for the rest of the Parliament, the Prime Minister has told his closest advisers that the public would not be willing to pay ever-increasing taxes for public services.

As the Government prepares to invite US companies to set up private hospitals in Britain, which will be used by the NHS, two of Downing Street's most senior figures confirmed to The Observer that Blair still wanted New Labour to be seen as a low tax government.

'We are not changing into what some people might call Old Labour,' said one. 'We are still a party that believes in low tax, which this country still is in comparison to most of our competitors.'

The official pointed out that many other taxes, such as fuel duty and the road fund licence, were not increased in last week's Budget. 'That was an important signal,' the official said.

Another key Blair adviser said that it would be 'politically daft' to try to win an election on a record of increasing taxes. The adviser also described New Labour as a 'low tax' government.

The strong briefings reveal a sense of nervousness at the heart of the Government that the public may turn against the tax increases if they do not see any improvements in the NHS.

The super-regulator charged with auditing improvements to the health service and reporting directly to the public will not be in a position to start its work until at least 2004, leaving the Government to rely on the present inspection system which officials admit is flawed.

Officials are also concerned that dealing with high levels of waste in the NHS and debt repayments means that much of the money will not actually go to frontline hospitals.

Blair appears on the BBC's Breakfast with Frost this morning as part of the continuing effort to 'sell' the tax increases to the public. Although he will not give a direct tax 'pledge' he will make it clear that the billions of pounds of extra taxpayers' money announced in last week's Budget allows enough funding for the NHS improvements.

He is also likely to be tackled on plans to allow increasing private involvement in the health service to get the results the Government has promised.

American private healthcare firms will be invited to set up profit-making clinics in the UK, treating NHS patients for free and then charging the NHS for their services.

'There are a number of American companies keen to come here. That means we would be able to both expand NHS capacity and it helps to create patient choice,' said one source close to the Secretary of State for Health, Alan Milburn.

'We are certainly not against the idea of overseas providers coming here with their staff, building a hospital and staffing it and becoming wholly part of the health service here.

'With a payment by results system being in place, we could do that and they would be assured of getting resources for their investment.'

The US firms could be invited to build some of the new fast-track surgical clinics which Ministers intend will cut waiting times by carrying out thousands of routine operations. They could also open up and use NHS wards mothballed for lack of staff or funds.

Ministers are also meeting next week with the Californian healthcare company Kaiser Permanente to discuss its system of cost control.

The small print of the reforms unveiled last week reveal that the Private Finance Initiative - hated by many Labour MPs - will also be hugely expanded into building GPs' surgeries, mental health clinics and community care centres. PFI would now become 'the mainstream way' of funding capital investment in NHS buildings, senior sources said.

The number of operations commissioned by the NHS from private hospitals will more than double from 80,000 in 2000-01 to 150,000 a year. The private healthcare sector has reacted with delight, predicting it could handle up to a million NHS operations over this parliament.