Come clean on tough choices

I bring Tony Blair some good news - and some bad news. The good news is that his wish has been granted. The media is once again paying attention to real political issues.

The bad news is that the stories make grim reading: how our train services will get worse next year; how millions of people expecting a comfortable pension may be in for a shock; how NHS waiting lists are getting longer once again; how tomorrow's graduates must pay much more for their education.

These are not purely random events. They are connected by a single, large question that New Labour has so far largely ducked. How, in the long run, can it reconcile its two aspirations: to create an American-style low-tax market economy while providing Europeanstyle hospitals, schools, universities, roads, trains and welfare?

Until now, Labour has kept this dilemma at bay through a mixture of skill, luck and an adept use of smoke and mirrors. The skill has come from Gordon Brown's management of the economy, which has seen more jobs and lower interest rates. These have knocked billions off the cost of unemployment benefit and debt interest.

The luck has come from the way income tax revenues have flowed in faster than the Treasury expected. The smoke and mirrors have taken the form of stealth taxes. These three factors have allowed the Chancellor to fill his public spending war-chest.

No longer. The economy is wobbling. The costs of unemployment and debt interest are more likely to go up than down. Tax revenues are now falling short of Treasury forecasts. And there is little room left for new stealth taxes.

Labour, then, faces a critical choice: whether to curb its ambitions to provide us with superior public services, or to come clean about the cost of paying for them. At present, about 40per cent of Britain's national income goes to the Government. We aspire to levels of health, education, transport and welfare that are typical of countries where the state gathers nearer 50 per cent.

What, then, are the options? The Left, or "real Labour", preference would be higher general taxes.

Mr Brown has already nodded in this direction when he raised national insurance rates to pay for the NHS. But to do this across the board and lift government revenues to half the national income would be a different matter altogether.

It would mean raising the basic and higher rates of income tax by 15p and introducing VAT on food and increasing VAT to 25 per cent.

Hands up who would vote for that? I thought so. Let's move swiftly on to the second option: giving up the aspiration for better public services and settling for a society in which the state does the bare minimum, keeps taxes down and leaves most of us to fend for ourselves.

As with the higher-tax option, this would bring joy to a vociferous minority. But it holds little appeal for the voters of middle Britain. This leaves only one way forward: for the state to arrange for the kind of services and welfare system that most of us want, but to find new ways to pay for them.

This is what is now beginning to happen. Within a few years, we are certain to have a new financial system for higher education (probably a graduate tax) and new rules governing pensions, so that the state provides a safety net for the poor but requires everyone else to save sufficiently to provide for a reasonably prosperous retirement.

Congestion charging is likely to spread to most big towns and cities (providing it works in London) and motorway tolls could well be a major source of cash for future roadimprovement programmes.

In time, do not be surprised if workers must insure against invalidity, or if hospital inpatients must pay means-tested "hotel charges" for the non-medical costs of their treatment, or if the fire service pays for itself by reclaiming the costs of callouts from household, commercial and motor insurance companies, whose premiums will have to rise to meet the charge.

That, or something like it, is the way we are heading. You don't like the sound of it? Nor, frankly, do I. But I like the alternatives even less: much higher taxes or lousy public services.

Tony Blair's new year resolution (and Iain Duncan Smith's, for that matter) should be to come clean about the choices we all face. Otherwise, shock-horror stories, such as the latest about the state of our railways, will become routine. If they do, the Government will attract the blame, and deserve it.