Tax rise is a certainty

SLOWLY but surely, it is dawning on the public and the experts. New Labour's return to the big spending style of the pre-Thatcher era is not working.

Unfortunately, Tony Blair's administration is refusing to recognise this reality. Having already hit middle Britain with large-scale tax increases which came into effect in April, it is grubbing around looking for new stealth taxes to pay for its poorly executed expansion of government.

All it has successfully achieved so far is a huge increase in the regiments of public sector workers which almost exactly parallels the shrinkage in the wealth-creating manufacturing sector of the economy.

Gordon Brown, dubbed the Iron Chancellor for his tight grip on public finances, cannot say he wasn't warned of the dangers. The International Monetary Fund (where Brown chairs the most important policy-making committee) argued in its annual inspection report on Britain that the speed with which the Government is spewing out cash risks 'inefficiencies'. Now the European Central Bank has joined the chorus of criticism.

ECB economists say that, in the delivery of public services, the Government lags behind many of its competitor nations. It suggests that as much as £70billion a year, a sum almost equal to Portugal's total annual output, is being wasted.

We may perform better than France and Germany, but lag way behind the US, Japan and Australia in bangs we get for our bucks.

Yet under this Government, spending is heading inexorably upwards. Departments which once grappled with the Chancellor and his spending overlord, the Financial Secretary, for an extra few million can put out their hands like Oliver Twist and ask for more with no fear of rejection.

Numbers released by the Treasury show that spending on education has surged by £14 billion to £53 billion since Labour arrived in Downing Street.

Health care spending soared by £25 billion to £82 billion and 'social protection' - government speak for hand-outs - climbed by £23billion to £122billion.

Overall, public spending has rocketed by a quarter to £ 420billion. This is the equivalent of just over 40% of the wealth created by the nation each year. When Gordon Brown embarked on his public spending splurge in Labour's third year in office, he was able to do it with impunity because of the cash reserves he built up through initial prudence.

Big hidden tax hits on Britain's pension funds and the electricity utilities helped keep Britain in the black. The Chancellor also raised a whopping £22 billion from the sale of the third-generation mobile telecoms licences, which he used to reduce the national debt.

Uninterrupted growth between 1997 and 2002 also helped to fill the coffers. And the stronger the growth, the bigger the tax revenues from individuals, companies and the City of London, one of Britain's best little earners.

But prudence is in full retreat. In his 2002 Budget, the Chancellor asked the nation to make a sacrifice in order to save the National Health Service. We all started to pay the price this April with the double whammy of a one% surcharge on the National Insurance paid by individuals and the organisations for which we work.

At the same time, Brown froze our personal tax allowances, pushing increasing numbers of people into higher tax brackets. The impact of this is evident from Government figures just released by the Office of National Statistics. These show that income has fallen by 1.3% overall since April and by 1.9% for those in the private sector. This is the equivalent of a pay cut of £475 for someone on a salary of £25,000 a year.

Another study, by the free market think-tank The Centre For Policy Studies, has produced equally alarming figures. It argues that, as a result of slower growth, income has dropped by £2,000 for every household.

At the same time, the taxation burden per household has climbed by £4,000 a year, leading to a £6,000 hit for those affected.

If there was to be an economic recovery this year, then Brown may well have got away with his gamble on ever higher public spending. Unfortunately, the uncertainty as a result of the Iraq conflict, with a very patchy global recovery, means that Britain's economy is growing at 1.8% this year, well below the 2-2.5% projected by the Treasury in the March Budget.

All the major economic forecasters are now united in the knowledge that, if public investment is to continue at the same pace, Labour will face a financial crunch in 2005-6 - the likely year of the next General Election.

The influential National Institute projects a budget deficit of £40billion in that year, which will put Britain well outside the requirements needed to join euroland. That may come as a relief to eurosceptics. Less palatable is the warning that 'without tax increases a large fiscal deficit is looming'.

Not to be outdone by this flurry of reports, the City is predicting an even worse outcome. At least two major forecasters say the deficit could climb to £50billion, the highest figure since Norman Lamont was Chancellor.

For those who have forgotten, Lamont's disclosure of this shocking deficit - the highest in Britain's history - was followed by a devastating tax-raising Budget which helped to drive the Tories into backbench exile.

The big question now for the Government is whether it will continue with its 'tax and spend' strategy in the face of growing public criticism.

Certainly, in most publicly funded areas, from the NHS to transport, its supporters say the Government can point to few tangible achievements as a result of big spending.

In fact, target-based health care has proved an unmitigated disaster, leading to all kinds of medical distortions in every area, from primary care to waiting lists and vital surgical procedures.

Transport, meanwhile, is a terrible failure. The Tube has got worse, new railways like the West Coast Main Line are in abeyance and road policy is a shambles.

So what can New Labour do? The advice from the outside experts of the IMF, the Paris-based OECD and now the ECB is for Labour to pause and seek to make better and more efficient use of the resources it has allocated, rather than pour good money after bad.

But having caught the spending habit, the Government will find it increasingly difficult to turn off the spigots. Gordon Brown was the Chancellor who promised the nation an end to boom and bust. But in the public finances, bust is precisely where we are heading.

The Cabinet faces the unpalatable choice of cutting expenditures - and storing up fresh trouble on the backbenches and with the unions - or raising taxes and destroying the trust of those who gave Labour its big majority.

In truth, there is no choice. A failure to address surging levels of borrowing will lead to a full- scale crisis on the financial markets. And like so many governments before it, the Blair-Brown coalition could yet find itself defeated on the core pocket-book issue of economic competence.