Brown keeps eye on 2005 election

What is Gordon Brown really up to? Ahead of Wednesday's Budget, the signs point to tax increases of £5 billion-£7 billion a year, to take effect next April. The main source of extra revenue will be higher national insurance. At the same time, Mr Brown will promise extra cash for the NHS.

Pre-Budget leaks are not always reliable. It may be Mr Brown is keeping some surprises up his sleeve. Meanwhile, let us dispose of the myth that higher taxes are needed next year to pay for a better NHS. Existing plans allow for sharp increases in NHS funding both this year and next.

Mr Brown may announce a billion or two extra for next year, on top of existing plans, but these would require no more than a little tinkering of the tax system. Besides, predicting the Government's finances that far ahead is hazardous. If the economy does well and tax revenues are buoyant, no tax increases may be necessary. If the economy stumbles, tax increases may be necessary. The point is that those decisions can wait. So why is Mr Brown so determined to do it? The official, off-the-record, government response is: "Whatever happens in the short run, much more money will be needed in the long run. Tax increases at some point are unavoidable. We need to make that argument now - and reassure the financial markets that we won't take risks with the public finances to reach our social objectives. That is why we are saying this week what we will do next year."

But where does the figure of £5 billion-£7 billion come from? "We are being cautious. We are not sure what will happen to the British or world economy. We have been gathering in less tax recently than expected. One reason has been the collapse of City bonuses." In other words, most of the specific tax rises to be announced are needed to pay not for hospitals but for prudence.

The political fact underpinning Mr Brown's decisions is that his is the first Budget of the new Parliament. The next general election is at least three years away. Voters will not be required to deliver a verdict until after the next Budget but two.

His hope is the economy will grow at an average of 2.5 per cent a year, and that tax revenues will climb at the same rate or even a little faster. This kind of growth allows public spending to climb by at least £10billion every year in real terms. In other words, there may be no need to raise taxes at all in the current Parliament.

At worst, a modest increase may be needed in two or three years' time. But Mr Brown does not want to ruin either Labour's or his personal prospects by increasing taxes just before a general election. By announcing tax rises of £5-7billion in this week's Budget, Mr Brown is trying to ensure there will be no bad news in the run-up to the next election. If things go well, we can expect him then to cut taxes as he ploughs more cash into our public services. If the economy does a little less well, then he should at least be able to avoid further tax rises until after Labour's third victory.

Either way, this week's Budget is the opening shot in the 2005 election campaign.