As night follows day, taxes will rise

GORDON Brown has delivered a Budget based on the false assumption that the British people can have it all. He is asking us to believe that he can cut taxes for key groups, including pensioners and families, and continue to raise public spending on health, education and other services.

But when one strips away the vote-catching rhetoric and digs into the economic and financial plumbing, the foundations of any Budget, a different picture emerges.

One discovers a Budget in which the Chancellor is scrimping and saving to pay the bills he is running up. Forecasts for tax revenues are highly optimistic.

Borrowing is still climbing when it should be falling after several years of above-trend growth. And the eventual need to raise taxes, to get the nation's debt under control, is now there for everyone to see, except the Government itself.

Brown loves to tweak the tail of his critics by pointing to his stellar record on the stewardship of the British economy over the last eight years. Of course, he is entitled to take credit for low inflation, historically low interest rates and at least some of 50 consecutive quarters of uninterrupted growth (the first 19 of these were under the Tories).

But although this is a powerful message to an electorate which feels more prosperous than at any time since Harold Macmillan's 'you never had it so good' years of the late 1950s and 1960s, it by no means tells the full truth.

For the last eight years, the fiscal rules which guide the Chancellor have been kept in good order as a result of measures which he took early on in the New Labour administration. He built up a war chest through a windfall tax on the utilities, taxing company pension funds and the huge bonus the Treasury received from the sale of the third generation mobile phone licences.

At the start of Labour's second term, when the numbers began to go awry, he slapped a 1% surcharge on employer and employee National Insurance contributions to pay for lavish spending on the NHS. Now, the public finances are again out of kilter and taxes, I predict, will have to be raised.

In the short-term, the Chancellor found a number of devices yesterday to pay for his extra spending on pensioners and other recipients of the State's munificence. These include a mini-windfall tax on oil companies, which yields an extra £1.1bn this year, and promises of a tax avoidance crackdown, which will raise £2.8bn over the next three years. He also cut aid to businesses in deprived areas to pay for the stamp duty handout he gave to houseuyers.

But the truth is these 'reforms' help to disguise the fundamental problems facing Britain's economy. Borrowing, which is projected at £32bn in the new financial year, will decline only slowly and will still total £25bn in three years.

The Chancellor projects he will meet his 'golden rule' requiring him to borrow only to invest over the economic cycle, which ends next year. But to do so, he is skewing the figures and making brave assumptions about tax receipts. For an example, look no further than the 'saving' of £ 3bn which in reality is achieved by moving the cost of road repairs out of the category of current spending and into capital spending.

But the key to his figures is his valiant optimism about economic growth in 2005 - projecting it at 3% to 3.5% despite the fact that there are clear danger signs that consumers are beginning to hibernate amid the weakening housing market.

Most critically, however, Brown is setting heroically high hopes on raising extra revenue from taxes on business. In the final months of the tax year just ending, the Chancellor's bacon was saved by an increase in corporate profits across the board. But even with this help, actual corporation tax receipts came in below target at £28.6bn - against the £34.1bn forecast.

In the new tax year he plans to collect a mind-boggling £ 43.7bn of tax from business, more than 50% more than this year. The Treasury believes that a combination of higher oil prices - which boost North Sea oil revenues - more rigorous tax collection and the strength of Britain's firms will deliver. But recent trends show a consistent shortfall from business taxes.

The bottom line is that for all his economic successes of the last eight years, Brown is not a miracle worker. He cannot continue to pump cash into the public services at present rates and adhere to the prudent Budget rules on which his reputation as the Iron Chancellor were built.

Yesterday gave him the vital chance to reach out to voters from all sections of society. He did this most effectively by both sounding the starting gun for the General Election and also shooting the Tory foxes in the shape of tax reliefs for inheritance, first-time buyers and council tax payers. Indeed, there was even something for savers with the extension of the individual savings account scheme which is largely beneficial to the middle classes.

But the inescapable truth is the public finances have deteriorated sharply. The deficit on current spending is 60% higher than forecast a year ago at £16bn. The Chancellor must borrow a further £165bn over the next five years when the budget should actually be moving back towards balance.

The only way out of this trap is to abandon the hard-fought-for rules upon which Labour's reputation for economic stability has been built - or to raise taxes.

The former cannot even be contemplated without precipitating a full-scale financial crisis. So instead, taxes will have to be raised in future years. The City and financial experts say at least £10bn extra will be needed.

Brown's natural caution means the obvious cost of the electoral bribe is minimal. But no Chancellor can keep spending at rates above the growth of the economy without accumulating ever larger debts. If the public finances are to remain in order, taxes will have to rise over the next few years, as night follows day.