Labour's great tax debate is a fraud

Prime Minister Tony Blair asks the nation to have an honest debate about the need for higher taxes to fund public services, but that very statement is a deception. It implies that we have had no significant tax increases in the five years Labour has been in power, and so are morally in the wrong to resist paying more now.

It is not true, other than in the sense that the accountants who put together the books of Enron may have thought they were telling the truth. Their profession is fond of saying it is not enough for the numbers in company accounts to be correct - if they are not to mislead the public, their presentation also has to be fair. It is on that double test of truth and fairness that the Prime Minister, the entire Government - and probably all politicians - are found wanting when tax is the topic. So let us start with some whole, rather than partial, truths.

In Ken Clarke's last year as Tory Chancellor in 1997, he forecast that his total tax take would be £270 billion. Five years on, in the current financial year, Chancellor Gordon Brown says his total tax take will be £400 billion. It is a staggering sum of money. It means that, on average, under Labour each year we have paid £26 billion more tax than we did the previous year (to say nothing of the Government's £20 billion windfall from auctioning mobile-phone licences).

But this massive bonanza did not come from Gordon Brown's much- derided stealth taxes - not more than a third of it anyway. Most of it has flowed in because the economy has grown - employment has risen, incomes have risen, profits have risen, spending has risen - and the Government has been able to help itself to a slice of each ingredient of this much bigger cake.

There remains one great unanswered question. The difference between the 1997 tax yield and now is £130 billion, which means that this year Gordon Brown has almost half as much money again to play with as Ken Clarke did - yet we have nothing to show for it. Where has all this extra money gone? How can the Chancellor take in so much extra revenue and still claim not to have two spare bawbees to pay for the most obvious and pressing improvements in schools, hospitals and transport? The more he has claimed to be prudent, the more we should have been counting our spoons.

If this is the starting point of the debate on whether taxes should rise, the first question from the floor ought to be how much extra the NHS needs. The figure of £10 billion crops up frequently, which suggests it has its origins in some Whitehall briefing. But a sum that small hardly seems to warrant great national heart-searching - particularly when taxes are going up by £26 billion a year anyway. As a proportion of this year's total national income of £1,000 billion, an extra £10 billion represents a tax increase of just 1p in every pound we earn. So what is the fuss about?

Before the last election, Tony Blair said he hoped to raise UK health spending to the average of European levels over the life of the current Parliament. But that would cost far, far more than £10 billion, which would barely pay for a round of sandwiches at the NHS feast. The best way to compare spending between countries is in terms of slices of the total national cake, which would mean raising British spending from about five per cent of Gross National Product to something over eight per cent. We are now so far behind that only Ireland and Luxembourg spend less. If last year we had applied the Blair rule, and spent the same proportion of our GNP on health as the average EU country, we would not have poured £40 billion into the NHS, but £72 billion. Which means the gap is not £10 billion, but £32 billion. And that implies taxes going up not by 1p in every earned pound but by three times as much.

This presents the Chancellor with a serious problem. Though there are already taxes on everything that moves, most don't yield much and some are more trouble than they're worth. He dare not add much to petrol, while adding to cigarettes and tobacco simply encourages more smuggling. Which leaves just four areas with a rich seam of wealth to be mined: corporation tax, income tax, National Insurance and VAT.

Two of these rule themselves out. Corporation tax because company profits are under pressure and increased tax could hit investment and jobs; income tax because Labour has promised not to change the basic rates.

So the favourites, as usual, are VAT and National Insurance. Of these, higher VAT would make most sense. Mr Brown could raise his £10 billion-by moving the rate to 20 per cent. It is a good time to do it, with inflation below target, because it would damp down consumer spending and reduce the pressure for higher interest rates. But it is regressive - it hits poorer people harder and so is a tough one for Labour to promote, unless accompanied by bigger concessions on income tax for the lowerpaid.

That leaves National Insurance, which is income tax in everything but name. It could go up for everybody by one per cent, producing about £3 billion, or the earnings ceiling - currently just over £30,000 - could be lifted. If applied to all income, it would add about 10 per cent to the tax rate of anyone earning more than £30,000, so someone on £100,000 a year would pay £7,000 more in tax. It would bring in that missing £10 billion and probably not lose Labour a vote.

The Left would love it and the well-paid would object - but they would probably reckon they still get a reasonable deal with what would be an effective tax rate of 50 per cent.

So the money could be raised, and raised quite easily - which makes one wonder if this debate is not something of a fraud. Rather than focusing on whether a relatively small addition to the total tax take is necessary, we should really be asking what happens to the enormous sums the Government already collects, and question whether we get value for money for them. If, as I suspect, we do not, then why will any further money be better spent than the billions which have gone before?