Will Mr Brown hang for a sheep or a lamb?

Twice a year, sometimes three, Gordon Brown takes part in a familiar and enjoyable ritual. He stands at the despatch box, proclaims that his prudence was for a purpose and then hands out goodies to a grateful nation. After an hour extolling the virtues of the British economy, he stands down to the adulation of the Labour benches, and anticipates the laudatory headlines in the morning papers. Most of this is deserved: no previous Labour government has achieved such a benign combination of low inflation, low unemployment and low mortgage interest rates.

But that healthy glow, that aura of invincibility, is fading. Mr Brown, in his latest pre-Budget report, has been forced to revise down sharply his estimates for economic growth. Before the next election, we shall discover what this government is really about, and how skilful a chancellor Mr Brown really is. He faces not only the effects of a global slowdown that shows few signs of improving. He must also soon face the truth that much of Britain's present prosperity is a chimera, based on an unsustainable housing boom that has inflated individual asset values and thus created a consumer boom that defies a sharp decline in business investment and confidence. Mr Brown, therefore, can no longer rely on burgeoning tax revenues. Nor are more such wheezes as the sale of mobile phone licences likely to rescue him in the near future.

For the time being, Mr Brown can fill the gap by borrowing. Unlike any previous Labour chancellor - and, for that matter, unlike most Tory chancellors - he has played the economic cycle by the book, squirrelling away the money in good times to see him through bad times, when public spending is in any case needed to boost a flagging economy. Even the additional £29bn of borrowing over five years, announced in the pre-Budget statement, will keep government debt at well under 40 per cent of GDP - far less than in most other industrialised countries.

But within the next three years, new Labour will almost certainly have to find other ways of raising money. It is not just a question of maintaining the admirable attack on child poverty. When Mr Brown announced in July his spending plans for 2003-6, he was ushering in what he hoped would be a new era of sustained high levels of investment in public services, with annual increases of between 6 and 7 per cent for health and education. To revise the figures downwards would be politically devastating. It would be all the more so if the government were spending significant sums on a war that most of its supporters in the labour movement oppose.

For nearly a decade, new Labour has tried to avoid biting the bullet on tax. In fact, Mr Brown's stealthy ways have already succeeded in hitting the middle classes with a tax bill that the Daily Mail, with typically imaginative arithmetic (it envisages an average family moving house while Grandma undergoes a costly hip replacement in a private hospital but then dies, leaving an inheritance tax bill), estimates at £23,220 a year. The point here is that, for all its efforts at avoiding offence, new Labour has still managed to attract the odium of the paper that regards itself as the voice of Middle England.

In other words, Labour leaders should now ask themselves if they may as well be hung for a sheep as a lamb. Better surely to make the case for the pain of higher taxation - as Margaret Thatcher made the case for the pain of job losses - rather than to leave the Tories and the Daily Mail to reveal the figures and present the whole thing as a piece of trickery. How can the British middle classes ever be persuaded that if they want better public services, they will have to pay for them, if even the government itself seems reluctant to admit it? Mr Blair's insistence, against a doubting Mr Brown, on renewing Labour's pledge at last year's election not to raise the basic or top rates of income tax now looks more politically and economically cowardly than ever. The idea that a chief executive earning a million-plus package should pay the same 40 per cent as a middle-ranking teacher is an offensive anachronism.

The truth is that, for all the talk of tough choices, new Labour has not made the toughest of all. Ministers have, to be sure, made themselves unpopular with sections of the Labour Party, by, for example, their pro-US foreign policy, their illiberalism on crime and immigration and their lack of reverence for comprehensive schools. But they have not yet taken on the big battalions in society: when they briefly confronted them over fuel taxes, Labour retreated. Many of them clearly relish the battle with the "greedy" firefighters for the sake of the public purse. But the public purse may also require them to use the same courage to insist on higher taxation.

Modernise, and get wet

We must all, as Stefan Stern explains on page 13, modernise. Some may think, as Mr Stern's quiz implies, that this is simply a matter of workers, such as the firefighters, going back to doing as the bosses tell them - conceding, to use a vogue phrase of the Tory era, "the right to manage". But rather than being so negative and cynical, we would do best to embrace this useful concept in all areas of life. A man who leaves his wife for a younger woman, for example, instead of being denounced as a selfish bastard, should be praised for having modernised. A journalist whose copy has been rewritten by an editor should not complain but recognise that his work has been modernised. If your pension now looks to be worth about half what you thought it was, do not despair: it, too, has been modernised. And if it seems to be raining all the time these days, please understand that the weather has also been modernised.

This article first appeared in the 02 December 2002 issue of the New Statesman, Alone they stand, against a dominant PM