Tax crisis looms for Blair

THE sharp deterioration in the public finances looks as if it will be the next big crisis for Tony Blair and the Labour Party.

Latest forecasts from the influential National Institute show soaring borrowing numbers rising to £34bn next year and £40bn in 2005/6 - widely believed to be the year of the general election.

This means that the government will have to raise new taxes, beyond the billions it is raising this year from national insurance and freezing personal allowances, if it is not to breach both the Chancellor's own fiscal rules and those of euroland.

Insight was gained into just how out of kilter the public finances have become with the release last week of data which showed that borrowing reached £7bn for May alone.

The prospect of higher borrowing and even higher taxes might be greeted with some equanimity were Labour delivering on public services. But it is not. Despite the tens of billions earmarked for education, health and transport there has been no marked improvement in delivery. In the case of the railways, the complexity of Network Rail and two regulators has created a monster that is gobbling up money and providing less service.

In fact, one of the regulators, Tom Winsor, proposes cutting off funds for modernisation of the West Coast main line - the jewel in the crown of a modernised transport system. Nothing could be more defeatist.

The monthly employment numbers provide some clues to where taxpayers' money is going, with more than 100,000 workers being added to the public payrolls. Welfare budgets - social protection as we are now meant to call it - have also rocketed, disguising the underlying picture in the workforce. Among the reasons that borrowing is rising so fast is that the economy has deteriorated more sharply than expected.

The National Institute has upped its forecast for growth this year to 1.9%, no better than last year. But with the assistance of lower interest rates it does see a pick-up in 2004 to 2.7%.

There are risks to the outlook. This week's CBI survey pointed to the misery of manufacturing. Retail sales took off in June, climbing at 1.9%, with Harry Potter and summer clothing among the factors driving the increase. These are exceptionals that are not likely to last.

With tax increases off the agenda before the next election, the Chancellor will have to start pressing down on the budgets of spending departments. Given the lack of delivery, this will not be before time.

Footie fallout

CHELSEA chairman Ken Bates does not show much respect for regulators. Since Russian billionaire-Roman Abramovich came along and relieved him of the football club with a bid valued at £140m, he has not spared the blushes of the City watchdogs.

The Takeover Panel has been described as 'a bunch of plonkers' and Bates has now added to the gaiety of nations with his assertion that the Financial Services Authority are 'little worms'.

But whether the Chelsea chairman likes it or not, the City regulators perform an extremely important function. It is the Panel's job to ensure fair play in bids and and the FSA's to keep the City clean and protect investors.

Bates may be walking away from the Chelsea takeover with a handsome cheque, a seat on the board and the best box at Stamford Bridge, but some smaller investors have been less fortunate.

Those who bought shares in the 1996 float at 55p are nursing losses of 20p a share or more. They may be comforted by the fact that Chelsea has a benevolent new owner who is lashing out cash on players.

But for their sakes alone the FSA deserves support as it seeks to get to the bottom of a Byzantine ownership structure.

Prosser's prize

AFTER all the speculation that Legal & General might follow Aviva by trimming its dividend, it has confounded the critics.

Chief executive David Prosser has recommitted the insurer to a progressive dividend policy as long as it can be afforded. At L&G the payout looks comfortably covered. The same may not, however, be the case at the Prudential.

But not all is perfect at L&G. The three-year bear market and the uncertainty surrounding the Gulf war meant worldwide new business tumbled by 9% in the first half of the year. But this was from a strong base in 2002 so the company was still able to book strong profits from new business.

The group has demonstrated that it can live in a low-cost environment. It has less to fear from the Sandler low cost insurance product reforms than many of its competitors.