Is tax still the Tories' last, best hope?

FOR British politicians of all parties, tax, like that other three-letter word which ends in x, is the ever-interesting topic. We may be more than two years away from a general election, but tax is once again barging its way up the political agenda.

After the publication by the Treasury last week of an exceptionally rosy forecast for the economy, Tory MPs experienced an almost forgotten emotion: hope. Even the most resolutely unmathematical could see that the predicted rates of growth and inflation might mean bacon-saving tax cuts.

Catching the mood of the backbenches - which now seems to be his highest ambition - the Prime Minister assured an audience of the faithful on Saturday: 'Our long-term plans are rooted in our old instincts: to cut taxes when it is prudent to do so. Our instinct remains to give people the power to spend more of their hard-earned money as they like. In this, we are the only tax-cutting party.'

The following day, the Chancellor, appearing on Breakfast with Frost, made a half-hearted attempt to try and dampen down his party's tax-cutting expectations, but ended up re-dedicating the Government to reducing the basic rate of tax to 20 per cent.

Meanwhile, Labour's leader-in- waiting, Tony Blair, found himself similarly drawn, arguing that while people on middle incomes had seen their taxes rise substantially, 'tax scams and perks' had led to some millionaires paying no tax. Mr Blair committed the next Labour government to closing loopholes and ensuring that the rich 'paid their fair share of tax'.

Although we can be certain that tax will again be centre stage in the run-up to the election, it is a little curious that both parties should seem so eager to talk it up right now. As things stand, it is some way from being a winning subject for either of them.

In the European election, Tory canvassers came away convinced it was broken tax promises - more than splits over Europe, more than the unhealed scars of the first recession to hit the southern middle classes since the Thirties, more than the fashionable ridicule of John Major - that had created sourness and apathy among the party's natural supporters.

Tory voters blame the Government on two counts: for allowing the recession to drag on because of its doomed adherence to the exchange rate mechanism and for allowing public expenditure to let rip. When ministers gave the impression 27 months ago that raising tax was further from their minds than legalising cocaine, they must simply have been lying. Even to mention future tax cuts while remaining committed to completing the two-stage introduction of VAT on domestic fuel next year, is, for many, a form of impertinence.

There is, however, little doubt, given the speed with which the budget deficit is falling, that the Government will be able to make a totemistic tax cut before the next election - watch out in the 1995 Budget for a big hike in the personal allowance. Until then, as Clement Attlee might have put it, on the subject of tax the Tories would be well advised to observe a period of silence.

For Labour, the politics of tax presents an exact mirror image. It's not that people no longer believe what the party said about tax at the last election. The problem is that they still do. Although the temptation to bang on about broken Tory tax promises is clearly irresistible, it may not be wise.

The difficulty for Mr Blair is that no matter how wretched the Tories' record or cynical their claims, nobody in their right mind actually thinks that taxes would be lower under Labour or public spending controlled with greater ferocity. A Labour spokesman only has to let the word tax out of his mouth for people to be reminded of why voting for even a well-scrubbed and thoroughly modern Labour Party might be a rather expensive way of expressing their fed-upness with the Tories. While Labour is obviously not going to repeat the mistake of telling the middle classes in excruciating detail how much poorer it is planning to make them, tax will still present the new leadership with an agonising dilemma.

Mr Blair and the shadow Chancellor, Gordon Brown, appear to think that the best strategy is to make no spending commitments which the Tories can cost, while suggesting that there is a big chunk of money to be recovered by closing loopholes, and talking vaguely about 'fair' taxes and progressive taxation. Only the 'rich' - now defined as people earning more than pounds 60,000 a year - will face a significant increase in their marginal rate of tax under a

Labour government, they hint.

Mr Brown is right not to want to give hostages to fortune, but what he and Mr Blair are saying, as they both must know, is almost devoid of meaning. The word 'fair' conveys nothing at all - what is fair to one man is rank injustice to another. To be in favour of progressive taxation is all well and good, but who isn't? As a matter of fact, the UK income tax system is already unusually progressive. Of 17 industrialised countries surveyed by the OECD in 1990 (two years after Nigel Lawson's watershed Budget), Britain proved to have very nearly the most progressive tax system on two out of three measures.

As for a crackdown on tax 'scams' and hitting the rich, it is an illusion to suppose that either will yield big returns. It is absurd to claim that the present government and the Inland Revenue are happily turning a blind eye to tax fiddles. There is a constant struggle against tax evasion. But it is like squeezing an inner tube: pinch in one place and air bulges somewhere else. Raising the marginal rate for those earning pounds 60,000 and above would be unlikely to pull in more than pounds 1.5bn. The trouble is that there just aren't enough of the 'rich' to make much impact in revenue terms.

The hard truth for Labour is that the only way to find the serious money to make a noticeable difference to the quality of schools, hospitals, and training for the unemployed and the underskilled is by raising the basic rate of income tax and raising it big - say to 30p in the pound. With an extra pounds 10bn to spend, Labour in office might actually accomplish something. Whether Labour in opposition could win an election on such a programme is another matter.

I do not think Labour should waste too much time trying to convince a sceptical electorate that it has no intention of raising taxes. What it needs to do is convince taxpayers that it would use their money at least as well as they would use it themselves. Above all, Labour has to show that the public sector can deliver without waste and inefficiency. If the party fails in that, it will once again buckle under the Tory tax onslaught.