It's back to the future as Labour likely to raise UK taxes

Gordon Brown's budget, if it contains the major rises expected, will confront the myth that the party's 'tax bombshell' handed the Tories the 1992 general election.

IF, as expected, Mr Gordon Brown, Britain's Chancellor of the Exchequer, announces more than £5 billion sterling (€8 billion) in annual tax increases in next Wednesday's British budget, he will confront one of the most powerful political beliefs - that it was Labour's "tax bombshell" that lost it the 1992 general election.

At that election Mr John Major's Conservative government was returned unexpectedly to power, with a slender majority of 21 seats. The result was one of history's quirks but its repercussions turned out to be epoch-making.

For Mr Major, the delight of winning a fourth successive term for the Tories rapidly evaporated as, in his own words, "the shells began to explode". Five months later, the humiliating withdrawal of sterling from the European exchange rate system wrecked the Tories' reputation for economic competence.

Mr Major struggled through five years of defections, in-fighting and sleaze before leading the Conservatives to their biggest defeat for 150 years - a defeat from which they have yet to recover. A narrow loss in 1992 might, by comparison, have been a blessing and set them up for an earlier return.

The consequences for Labour were no less profound. Many in the party hierarchy - notably Mr Brown, newly installed as shadow chancellor - concluded that John Smith's pre-election shadow budget, which proposed lifting the ceiling on national insurance contributions, was responsible for the defeat. It led to the revisionist policies of New Labour, created when Mr Tony Blair became leader after Mr Smith's death in 1994.

Mr Brown will try to lay the ghost of 1992 next week. In a recent interview the chancellor said: "If you start from 1992 and 1997, we had to show the public that we could manage the economy competently, that we could transfer resources from paying the bill of failure - high levels of unemployment and debt interest - and show the public you can secure value for money." That, he believes, he has achieved.

There is a neat symmetry: national insurance, the centrepiece of Mr Smith's shadow budget, is likely to be the focus of Mr Brown's tax-raising.

He may not remove the ceiling, but he is widely expected to raise it in combination with increasing the contributions rate, to fund higher health spending and maintain a safety margin in the public finances. It is a sign of the trust he believes Labour in office has won from the public.

Yet psephologists do not accept that tax was the issue that lost Labour the 1992 election.

"I have never been aware of any analysis that demonstrates that that is the case," says Mr John Curtice, professor of politics at Strathclyde University.

There is no evidence, from opinion polls or the British Election Survey, that voters were turned off by the shadow budget or tax policies.

It may simply have been that Mr Neil Kinnock, then leader of the party, was not seen by the public as prime ministerial material - in spite of his obvious likeability and the massive policy changes on Europe, public ownership and defence he drove through after Labour's nadir in the 1980s.

Mr Michael Jacobs, general secretary of the Fabian Society, a Labour think-tank, says of the tax effect: "I think it was a myth but, in the end, New Labour was created on the back of that myth, so it has a very profound truth."

Mr Jacobs sees two differences compared with 10 years ago. One is Labour's stronger economic credibility and the other is that the public has a greater appreciation of the seriousness of underinvestment in public services. Whereas Mr Smith wanted to raise taxes to improve pensions and child benefits, Mr Brown will be doing so mainly to improve the health service.

Ironies abound, nonetheless. "This is going to be a very Old Labour Budget," says Mr Jacobs. "Labour is going to raise direct taxes, as far as we can tell, to pay for a universal public service in a completely unreformed model.

"The key thing about Wanless [Derek Wanless, who will report to the chancellor on health funding needs over 20 years\] is, this is no change. One might have expected New Labour to have introduced social insurance or much more explicit topping-up but they haven't. They are defending a classic postwar model. It's also a Budget for redistribution because there's going to be all this money for tax credits."

A further irony, he says, is that the government is under pressure from restive backbenchers "just at the time when the so-called New Labour government is proving itself to be as classically a social democratic government as one could have imagined".

Mr Curtice says the chancellor is in danger of leaving it too late to win the argument for higher taxes. As a result of the indirect tax increases in Labour's first term, public support for paying more to fund services is waning. In the past, 60 per cent have been in favour of doing so but a recent survey showed the figure falling to 50 per cent.

Mr Jacobs says: "It's a huge gamble. It will be very difficult to go into the next election with the public feeling that public services have not improved enough and taxes having been explicitly raised for them. If New Labour can't do it with the combination of reform and tax rises, I think they are in serious trouble and the whole social democratic project is in trouble."

It's only saviour will be a Tory party that has not yet proved itself a credible alternative.