Leading Article: Now is not the time to be talking about cutting our taxes

WE DON'T know what effect Tony Blair will have upon the Conservatives, but, by God, he frightens the Labour Party - as the Duke of Wellington did not quite say. The Prime Minister sounded an authentic Thatcherite note in a weekend interview, discussing tax cuts in terms of "people who need to keep more of their own money", and describing the market as "the great engine for change" that is lacking in the public sector.

As we report today, this kind of talk raises the hackles of a significant block in the Cabinet, which is shaping up for a battle not so much between tax cuts and higher public spending, but over the balance between the two. The interesting question is where Gordon Brown stands on this issue. One of the joys of being Chancellor in a boom - sorry, in a period of macroeconomic stability - is that you can afford at the same time to cut tax rates and to increase public spending in real terms. But how much of each?

Mr Blair's implication yesterday was that he wanted to "let people keep as much money as they can". At other times, his emphasis on "delivery, delivery, delivery", and hints of a generous three-year spending settlement to follow the present one, which expires in 2002, sound as if he wants to spend as much of the people's money as he can.

Meanwhile, the Iron Chancellor and National Squirrel exhibits the customary Treasury distaste for having his Budget options pre-empted. But there is also a quite different tone to Mr Brown's language in discussing such matters. The implication often seems to be that he would like to rehabilitate the case for public spending, and hence for keeping taxes steady.

In this, the tensions between Mr Blair and Mr Brown reflect the national psyche; most people want to pay less tax and have better public services.

But the Prime Minister's neo-Thatcherism is more dangerous than the Chancellor's instinctive puritanism. The notion that the state is a giant parasite sucking people's "own money" out of them is a fallacy. The purpose of taxation is generally to provide those things that are better provided collectively than individually, or which can be provided only by the state. Above all, the case for more resources for our health and education services is strong.

But the overwhelming argument against tax cuts at this stage of the economic cycle is psychological. The last thing the British economy needs now is a further boost to consumer confidence. Perhaps the housing market is not overheating as much as the most pessimistic of the City doomsayers suggest, but it is beginning to as though interest rates will need to rise.

A pre-election boom would destroy New Labour's foolish claim to have abolished "boom and bust". And it would also be against the national interest.