If Labour wants to win the next election, we must tax the rich more

'The unions and the local parties, those who go to our conference, are the party's early warning system'

This is the first Labour conference since Tony Blair became leader where the leadership has lost any significant votes. Most spectacularly, conference backed a composite calling for the reinstatement of the link between earnings and the state pension. The sight of 90-year-old Barbara Castle must now be enough to make a generation of bright young Millbank things break out in a rash. What have they done in their few short years to deserve such an effective and relentless critic?

This is the first Labour conference since Tony Blair became leader where the leadership has lost any significant votes. Most spectacularly, conference backed a composite calling for the reinstatement of the link between earnings and the state pension. The sight of 90-year-old Barbara Castle must now be enough to make a generation of bright young Millbank things break out in a rash. What have they done in their few short years to deserve such an effective and relentless critic?

Inevitably the media loves the sight of a governing party - or even the official opposition - suffering "humiliation" at the hands of its own conference. The news is generally greeted as a "set-back" or an "embarrassing defeat". But I for one do not regard what conference did on Wednesday as in any way a defeat for the Labour Party. The set back for the Labour Party is that the Government did not accept the decision of the conference. Gordon Brown's response - "we are not implementing that policy, we are going to continue with our policy" - is a misjudgment of massive proportions.

Far from trying to damage the Government, conference was trying to help. Rodney Bickerstaffe of Unison argued rightly that "keep the basic state pension and you will get all the votes you want at the next election". Denis Healey was not a darling of the Labour Party conference during the last Labour government, when his economic policies became the central political battleground at annual conference. But Denis himself has subsequently argued that it was conference that was often right and the Government would have been sensible to have listened to it.

Conference is so often right because those who attend - either from the the world of work via the trade unions or the electoral coal-face via the constituency parties - are Labour's early warning system. They are like vulcanologists, picking up the rumblings of the volcano before it blows. Party leaders and governments fail to listen to them at their peril.

The pension issue has been appallingly handled by the government which failed to see the grey revolt coming. On Wednesday, the conference offered the government an opportunity to support a proposal which would have been universally popular. It is Cabinet policy, not conference votes, which is delivering a blow to the Government and the party. Events such as those this week directly lead to the common perception that socially progressive policies are generally forced out of the Government as concessions, rather than as something Labour actively wants to implement.

This is the irony at the heart of the New Labour project. New Labour was able to exercise such dominance over the Labour movement for so long - despite its relatively narrow base - because it put winning elections at the centre of its appeal. "Do what we say and Labour will win" was the message. Far from being the undisciplined rabble of popular stereotype, Labour and trade union activists swallowed their doubts because they wanted to win.

But since the election, New Labour has charged ahead with some policies which have been fundamentally unpopular. In London, the New Labour project has delivered the opposite of its rhetoric - the humiliation of third place behind the Tories in the mayoral election and the unheard-of sight of The Mirror backing the Conservatives.

The situation in London is compounded by the insistence on sticking to the planned partial privatisation of the London Underground under the Public Private Partnership. The PPP was dealt a blow this week by the report of the Industrial Society which argued that unless a series of improvements were made to the PPP, then it should not go ahead.

Underlying the Government's problems is that far from making too many concessions to middle England - which is a common misconception - Labour has not cemented the alliance between the less well-off and those on middle incomes with policies that will bind them together. This explains both the growing apathy among Labour's core vote and the growing antipathy among many of those who switched to Labour at the last election.

As I have argued here before, the fuel crisis was a direct product of economic policies which have not fundamentally reversed the tax legacy of the Tories. Under Thatcher and Major, high income earners benefited from income tax cuts while the overall tax burden in the economy was switched to middle and low income earners through indirect taxation (although middle income earners had always borne too much of the tax-take). That is to say, broadly progressive tax was replaced with increasingly regressive tax.

By ruling out any income tax increases at all, Labour has been unable to tackle this inheritance. It poses the danger that middle income earners hit by regressive taxation - such as fuel tax - will split away from Labour in favour of the other parties. We now have the preposterous situation that Labour is being outflanked on the left by the Liberal Democrats on the issue of tax, who rightly argue that those earning over £100,000 should be paying more.

At least one effect of the pensions debate has been to re-open this argument, with John Edmonds of the GMB union saying to critics of the earnings related pension: "If we don't want rich pensioners to have the full benefit of large increases, there's no problem. We have a time honoured system to deal with that - it's called the tax system."

John is quite right. Despite the election rhetoric, it is not possible for governments to abandon "tax and spend". It is simply that the burden of paying for the country's infrastructure and social spending can be passed from one group to another. For example, students and their families are now taxed through a system of loans and tuition fees rather than society as a whole paying through taxation for student support. Both are forms of taxation, but one hits Labour's potential supporters much harder than the other. The lesson of the conference vote on pensions is that winning the next election means following a policy on tax that holds together the middle and low income earners who are Labour's natural majority.