Forget tax cuts, it's time to spend

The Conservatives do not seem to be having much luck with their 'less tax but plenty of spending' commitment. It all sounds too good to be true, and the good old British public can see through these things.

Or can it? We have known this before. In the 1970s, Sir Keith Joseph (Margaret Thatcher's John the Baptist) drew up, with Geoffrey Howe and others, some very ambitious tax-cutting plans, which many of us derided at the time. But the Tories were elected in 1979 and went on to implement their tax cuts, although, given the unfortunate reputation the Labour party had acquired for irresponsible spending in those days, they did not feel the need to match Labour spending plans. On the contrary, they made no secret of their desire to cut back.

The irony was that, after the searing experience of having to borrow from the International Monetary Fund in 1976, Labour had become much more disciplined at controlling public spending (under the firm hand of that formidable Treasury civil servant, the late Sir Leo Pliatzky). And the Thatcher government was forced by circumstances - and its own incompetence - to adjust its sights, from trying to cut spending to attempting to freeze it and, finally, to reining back its rate of increase. Even so, as we know to our cost, the Conservative governments of 1979-97 did so much damage to the public sector and the physical and social infrastructure that we are still recovering from the shock.

And of course, they did not cut what they liked to call 'the tax burden': they reduced visible, direct tax rates. When they decided, in that first Conservative budget of 1979, that it would be politically inadvisable to reduce the top rate (from 83 to 60 per cent) without reducing the basic rate (from 33 to 30 per cent) they were faced with the implications for the public sector borrowing requirement, about which they had themselves made such a song and dance under Labour. To balance the books, they almost doubled VAT to 15 per cent.

This single episode had a devastating impact on inflation, going straight into the index of retail prices, and hence wage settlements, providing the major impetus towards a doubling in the inflation rate (to more than 20 per cent) in the following 12 months. By contrast, the 1979 budget that Denis Healey (Chancellor 1974-79) never delivered would have harmonised the existing standard rate of VAT (8 per cent) and higher rate (12.5 per cent) at 10 per cent, and was based on forecasts that inflation would fall from 10 to 5 per cent within three years.

The budget speech that was drafted but never delivered included an increase in personal allowances of 18 per cent (double the rate of inflation). It stated that the budget's objectives were the control of inflation 'and the maintenance of the financial stability enjoyed in recent months'. And there were references to the need to protect the poorest and most vulnerable members of the com munity, 'while not overlooking the needs of those higher up the income scale'.

For Healey, the highest priority in 1979 would have been 'defeating inflation', whereas for the Conservative government that took office it was tax cuts, which, via the VAT increase, made the underlying inflation problem much worse.

Healey would have sounded as concerned about 'stability' as Gordon Brown does today. Unfortunately, what followed in the early 1980s was a very unstable period, to which the monetarist and high exchange rate policies of the time made a large contribution.

The Wilson-Callaghan governments of 1974-79 made many mistakes, during a very difficult period for economic policy worldwide. But they always had an eye on the poor and the low-paid, and, for all its well-documented travails (the Winter of Discontent etc), Britain was a far less divided society than it became during the following 18 years, under policies that were often, alas, deliberately designed to widen divisions.

After losing the 1979 election, and therefore being in a weak position to produce a budget, Labour took a walk on the wild side, often, but not always, with the best of intentions. Neil Kinnock brought Labour back on to the pavement. Tony Blair and Brown carried on the good work of making the party electable again.

Unfortunately, they rather overdid the caution, because the 1997 election was not so much about electing Labour as about throwing out the Tories. But in the meantime, Labour had committed itself to a two-year freeze on public spending, which made things worse before they got better. Labour also accepted all sorts of nonsense, such as the private finance initiative, to please (and further enrich) the City.

Offering operational independence to the Bank of England was quite enough to please the financial markets, and Brown and Ed Balls were lucky that the generally disinflationary climate around the world made their inflation target consistent with the conduct of reasonably sound man agement of demand in the economy by the Bank of England's new Monetary Policy Committee.

Brown and Balls were shrewd in retaining control of the parameters within which the MPC operated. By contrast, what became known as the eurozone subjected itself to pre-Keynesian economic policies both in the run-up to the single currency and afterwards, with industrial powerhouse Germany suffering the added economic cost of unification.

So far, so good with the MPC, and the unemployment figures continue to be helpful from an electoral point of view, even if many jobs are what Nigel Lawson used to call 'low tech' or 'no tech', and so much of the 'service sector' comprises low-paid workers servicing those who have done well out of a seriously unequal society cultivated under Thatcher and little changed by Blair.

The bad news for this (New) Labour government is that the sequence of a freeze on public spending followed by large, planned increases has laid it open to accusations of 'famine followed by feast' and has set the alarm bells ringing. The good news is that the Conservatives are still going out of their way to look unelectable, and the Liberal Democrats, the major party to emerge with credit from the defining issue of our times - the wholly unwarranted invasion of Iraq, and its largely predictable consequences - is up against the intolerable handicap of our unreformed electoral system.

While the case for tax cuts over increases in public spending was usually won by the tax-cut school in 1979-97, the polls suggest that these days Labour is onto a winner in attacking the Conservatives for preferring tax cuts to spending on public services (the Tory line that they would retain certain Labour spending plans notwithstanding).

The Conservative 'wet' Francis Pym was punished by Thatcher for stating that large majorities were bad for the polity, but he was right. This year, Britain faces a situation where there is a clear division between Brown's view of the public sector ethic and Blair's desire for further Thatcherisation.

Some of Labour's elder statesmen, such as Roy Hattersley, argue that people should vote Blair in order to get Brown in due course - a neat twist on the Conservative scare tactic: 'Vote Blair, Get Brown'. But if Labour voters who wish to punish Blair for Iraq were to take Hattersley's advice, they could end up with a Blair who thought he had been 'vindicated' and carried on taking the Labour party in a rightwards direction - to say nothing of what he might have in mind for Brown.

It's not funny.