Blair and Brown may be accused of breaking their tax pledges. They don't have much of a defence

<em>Budget 2002</em> - There's going to be a punch-up with the big companies and Middle England may

Gordon Brown made history on Wednesday. Almost six years after Labour was returned to power, the Chancellor finally smashed the consensus on economic policy-making that has dominated British political life since the election of Margaret Thatcher in 1979.

A Budget speech that was vitiated as usual by irksome populist and paternalistic reforms could be boiled down to two simple claims: "We are no longer afraid to tax and we are no longer afraid to spend."

It was quite easy to miss this. Brown's Budget number six unfortunately distilled much of the essence of new Labour, in the sense that - in a slightly more desperate and less convincing way than usual - it endeavoured to please the Daily Mail and Daily Mirror at the same time. There was a fair amount of family-friendly, social engineering through the tax system to distract from old-fashioned, old Labour redistribution.

But the tax credits for parents on some pretty chunky incomes were as nothing compared with Brown's promise of a mind-boggling amount of new cash for the National Health Service. By 2007-08, the NHS will have had more than £40bn of additional money pumped into it every year. The notion that the UK is best served by a public sector committed to efficiency and belt- tightening has been well and truly dumped by this government, whatever Brown's rhetoric on the need for modernisation.

He also raised taxes in a way that is relatively transparent and honest, compared with the fudging and fiddling of his endless tax credits and manipulation of allowances. Typically, he devoted almost no time in his long and meandering speech to explaining any of this. If you were not concentrating, you might have thought his most important initiatives were a reduction in the impost on a pint of Old Peculiar and the abolition of bingo tax.

The most important sentence in the speech sounded dull and came at the denouement. "There will be an additional 1 per cent national insurance contribution from employers, employees and the self-employed on all earnings above £4,615."

In some ways, this is a brand new tax. Unlike the rest of employees' national insurance contributions, there is no ceiling on it. Whether you earn £10,000 a year or £1m a year, you will pay 1 per cent on all earnings over £4,615. For the first time, those at the top of the earnings scale are being asked by this government to make a significantly greater contribution to the Exchequer.

One concern is that NI has traditionally been a levy that those with imaginative accountants have found it easy to dodge. If Brown really wants a return to progressive taxation, he needs to ensure that NI reform does not turn out to be redistribution to the friends and clients of Arthur Andersen.

And note that companies are directly hit. The rise in their contributions is equivalent to a significant hike in corporation tax, offsetting years of cuts under Brown - though he has tried to shield smaller companies by simplifying the VAT system and reducing their corporate tax rate.

We must assume the PM is no longer quite so much in awe of big companies, because there is going to be quite a punch-up with them. Along with the national insurance change, the oil companies are being forced to pay much more tax on their North Sea profits, big overseas banks will have to pay a load more tax on earnings made in the UK and property companies will find it much harder to dodge stamp duty.

Anyway, this Budget represents the biggest risk Blair and Brown have taken with domestic policy. They will be accused of breaking the spirit of manifesto pledges not to increase the basic or top rates of income tax. And, to be frank, I am not sure they have much of a defence. So it will be interesting to see how riled middle income, Middle England becomes.

But there is an equally important question about whether the NHS can absorb so much cash in an efficient way. There will probably be endless tabloid tales of waste and corruption in the NHS, as the new funds are allocated. Voters will not be understanding, if they do not see a significant improvement in services.

As I have argued frequently in these columns, this government's failure to break up the NHS into manageable parts is a great disappointment. And if you want to understand the danger of what Brown has done, look no further than the career of Derek Wanless, the former banker who provided the chancellor with a report that justifies the huge increases in health spending.

Wanless was, until 1999, chief executive of National Westminster Bank. For the years he was in charge, NatWest generated more cash than it knew how to use sensibly. It grew fat and lazy. So the bank found itself on the receiving end of takeover bids and Wanless was forced to resign.

In the short time since Royal Bank of Scotland acquired NatWest, it has been able to reduce the bank's costs in a quite dramatic way. By next year, NatWest's annual costs will be £1.4bn lower than they were. That is a saving of considerably more than 20 per cent of overheads of both organisations - and it is not obvious that NatWest's 18 million customers are being worse served (in fact, service is in some ways better).

Saving lives and processing cheques are hardly comparable activities. But the Wanless story shows that more cash does not necessarily equate with better services. Finding the extra £40bn a year is the easy part. Putting it to work properly will be tougher.

Robert Peston is editorial director of QUESTTM;; e-mail

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