Shrewd or courageous?

AT THE heart of the Budget is a mystery. Why has Gordon Brown chosen to punish precisely the people that matter most to New Labour - the middle-income families in the suburbs that swung so sharply Labour's way in 1997 and last year? Although only one in 10 workers nationally earns more than £30,000 a year, the proportion is higher in these crucial marginal areas and much higher in places such as Harrow, Finchley, Enfield and Wimbledon that the party needs to retain if it is to stay in power.

Yet these are precisely where some of the glummest faces are likely to be found, despite the fact that £30,000-a-year families will be eligible for the new child tax credit, with the news that National Insurance rates will rise next year. True, some of their worst fears have not been realised. The top limit for National Insurance is not to be jacked up faster than the rate of inflation. But the 1% increase next year in the employees' rate, and the freezing of personal tax allowances, will hit them especially hard. Even if the unexpected rise in employers' National Insurance rates seems not to affect them directly, the increase in company costs is likely to feed through to salary levels, and indirectly hold down take-home pay.

Why, then, has the Chancellor acted as he has? One possible explanation is that he has successfully stung them before and hopes to pull off the same trick a second time. In 1997 he imposed a £5bn-a-year 'stealth' tax on pension funds and went on to abolish mortgage tax relief and the married couples' allowance.

The same trick will be hard to repeat this time. National Insurance is an obvious, in-your-face deduction, with the amount printed on every worker's payslip.

Is the Chancellor hoping that suburban voters will be willing to pay extra for better public services? To some extent. Although many middle-Britain families have private health insurance and use private schools, many more rely on the NHS and State schools.

Today's Wanless report argues that health spending may have to rise by more than £100bn in real terms in the next 20 years. If this projection is accepted, then it should be possible to argue that taxes must rise in the long term to pay for it.

However, if the economy grows by 2.5% a year, then in 20 years it will be £640bn bigger, in real terms, than it is today. The Government will have more than £250bn a year extra to spend without any need to raise taxes. Giving the NHS its Wanless bonus will be tough, but not out of the question.

In the shorter term, however, the Government's main task is to persuade voters by the time of the next election that the NHS is on the mend. This is vital if Brown is to have any chance of persuading middle Britain that the quality-of-life gains match today's financial pain.

There is, however, another part of explanation for today's Budget. Too often the tension between Brown and the Prime Minister is painted in purely personal terms. Too little attention is given to their different social objectives. Tony Blair's dominant concern is with moderately prosperous families, Brown's with the need for a more equal society in which hardship and poverty are banished.

Despite the rows, one of the great strengths of Labour since 1997 is that the two men have managed each year to strike a balance that has been socially shrewd and politically effective. The Chancellor has tilted the balance towards redistribution. He is spending £2.5bn more on the new working tax credit and child tax credit than the benefits they replace.

Low-income families, especially those with babies and young children, will gain, while those earning more than £30,000 a year will lose out. Perhaps, as the next General Election approaches, Brown will find ways to give some money back to middle Britain, beyond the announcement that some child credit will be available to people earning up to £58,000 a year, and that child care help will be available to families earning up to £35,000 a year. If he does not, then this Budget will be remembered as one of the most courageous that any Chancellor has delivered in recent times. And, as aficionados of Yes Minister know, 'courageous' in this context carries overtones not simply of praise, but also foreboding.