The New Statesman Essay - Blair's biggest U-turn

This is the year that Labour went back to tax and spend. But can ministers convince a deeply sceptic

How do you feel about paying tax? I met someone the other day who told me that he loved filling in his annual tax return. He spent hours over it, making sure that he declared every last penny of income, so that he would pay the maximum amount of tax. As someone with a comfortable living, he felt good about contributing to the common wealth, and wanted to do as much of it as possible.

Enthusiasm for taxpaying of this order is surely rare, but most people on the left should feel a degree of it. Collectivists at heart, we know that taxes are, as Keynes put it, the membership fee we pay for living in a civilised society. Taxes pay for the things we value: universal education and health services free at the point of use, social services that care for the weakest members of society, welfare benefits, public transport, overseas aid. We may sometimes wonder, particularly when we look at our overdrafts, if we really want to pay so much. But, at a political level, a positive attitude to taxation is one of those defining views that should distinguish left from right.

Unfortunately, this is not at all how the majority of British people think about taxation. The Fabian Society's Commission on Taxation and Citizenship, to which I was secretary and which reports on 28 November, ran a series of discussion or focus groups exploring public attitudes on the subject. The most striking and widespread response came out right at the beginning of every session: the extraordinary sense of alienation with which most people view the whole subject of taxation. Taxes invoked deeply negative feelings - not just political antipathy, but a highly emotional aversion.

This is not just a dislike of paying taxes, which would hardly count as news. It is that people seem to make almost no connection between the taxes they pay and the public services that these finance. Taxes are perceived almost entirely as a burden, a drain on the individual and family budget, from which no tangible gain is seen. People know that taxes pay for public services. But their perception of the past ten years is that taxes have risen while public services have got worse. So the link between changes in taxation and changes in public expenditure - which is what matters politically - seems more or less to have collapsed. Higher taxes have not led to better public services, so there seems no reason to think that lower taxes would lead to worse services. As one respondent put it: "You pay your taxes, but where's the money going?"

This "disconnection" between the public and the taxes they pay is linked to the popular view, which also emerged from the research, that governments are almost universally incompetent and politicians untrustworthy. Why should people pay more in tax - or even what they are paying now - if governments will just waste it? The Dome has become the symbol for this view, even though it was financed from Lottery money, not from taxation.

This isn't just about income tax. Until recently, it was received wisdom in political circles that, while income tax may have become untouchable, you could always put up indirect taxes because the public wouldn't notice them. No longer: now the public is highly conscious of, and indignant about, "hidden" taxes, too. Indeed, many people in our focus groups regarded increases in indirect taxes as even worse than rises in income tax: at least the latter are visible, they pointed out, whereas with indirect taxes you have no idea how much you are paying. Public support for the fuel-tax protesters in September was, therefore, no aberration.

This has important implications for British politics. The next election will be fought, above all, on the issue of tax. And the government has performed a remarkable U-turn on this subject. To put it crudely, it has shifted from the position held by the majority of the public to that held by the left.

No one who has read Philip Gould's account of the creation of new Labour, The Unfinished Revolution, can be left in any doubt of the central role that tax has played in the Blairite worldview. Almost more than any other issue, it was high taxes that symbolised old Labour. It was the image of Labour as a party of profligate "tax and spend" that made its own target voters so hostile to it. As such, it was high taxes from which new Labour had to distance itself. The result was the 1997 pledge that Labour would not raise basic and top rates of income tax during the lifetime of its first parliament. This was never a promise that Labour would not raise taxes overall; but it was clearly intended to sound like it, and, as our research respondents made clear, that was how it was heard.

But the pledge on income tax was not just a tactic, or even a policy. The belief that taxes really are a bad thing had entered new Labour's soul. In several press interviews in his first two years of office, the Prime Minister went out of his way to say that he hoped to cut taxes. In June 1999, he published a paper on the Third Way/New Centre with the German Chancellor Gerhard Schroder, which explicitly argued that the share of taxation in national income had reached its peak in a modern economy and should be brought down. The attack was not just on taxes. It was on "tax and spend" together, the evil twins of old Labour mythology.

That same message was in the first line of the 1997 Labour manifesto. You do not solve the problems of public services, it argued, by throwing money at them. Some new Labour people genuinely believed this. They thought that "modernisation" - reforms to structures and priorities - could achieve significant improvement in public services without any need for extra cash. In their view, taxes really were bad; they weren't just saying it.

But there was a problem. Labour was committed to reducing the huge budget deficit it had inherited from the Tories, and it had set itself strict borrowing rules. There was only one way to square this circle: the share of taxation in national income had to grow. But prudent fiscal policy came right up against the symbolic importance of taxation to new Labour's identity. The result was the extraordinary - but emblematic - spectacle, in the winter of 1999-2000, of the government trying desperately not to acknowledge what its own Treasury statistics were by now showing - that taxes had indeed risen. However important and necessary the fiscal policy had been, not least for the government's economic credibility, acknowledgement that taxes had gone up just couldn't pass our rulers' lips. The charade was brought to an end not by an official statement, but by a press briefing given by Alastair Campbell in March, in which he slipped out the "admission" (note the media's choice of word) that taxes had indeed risen.

But the real U-turn on spending had occurred two months earlier, in January. It was then that Tony Blair, in a Breakfast with Frost interview, committed the government to meet the demanding, not to say uncosted, "aspiration" of the European average for healthcare expenditure. The Prime Minister finally acknowledged that reform was not enough. Money - sheer cash - counted, too. With prudence yielding a fiscal bounty, the Budget in March and then the comprehensive spending review in July confirmed Labour's reconversion to a faith in public spending.

The U-turn on taxation came in the summer. Blair, writing in the News of the World, argued that high fuel duty was necessary to pay for schools and hospitals. For the first time, he defended high taxes on the basis of the good that they do. And, for the first time, he told the British public the uncomfortable but self-evident truth that they could not have good public services without paying taxes - and that if indirect taxes were high, this was because income tax was low. By the Labour Party conference in September, both Blair and Brown had gone on the offensive, explicitly defending the "tax-and-spend" policy.

To be sure, Brown has carefully left open the option of "targeted tax cuts" in the pre-election Budget next March and, with the Treasury's coffers now overflowing, he almost certainly has enough money to deliver them. But, in complete contrast to 1997, tax and spend is now the clear red water between the parties.

This 180-degree shift in approach will gladden the hearts of most Labour supporters. However, it would be a fatal error if it were to become simply a return to the old Labour position. For the world has changed. Put simply: the public can no longer be taken for granted.

Thirty years ago, when Labour last sought to tax and spend its way to political success, the majority of voters still had limited private spending power. Many were dependent on the state in significant areas of their lives: for their houses, for the bulk of their income in old age, for their transport, for the benefits that protected them against unemployment and illness. Compare the far more limited role that the state plays today - particularly for those on average incomes and just above, who constitute the major parties' target voters. Such people's self-interest in taxation has declined exactly as the proportion of their income that they pay in tax has increased.

But the sociological changes go further than this. As earnings have risen, private consumption has come to play a much larger role in people's lives. Consumer choices have become more important in shaping identities and lifestyles. The private sector puts enormous effort into responding to these trends (as well as into shaping them). Much more emphasis is given to customer service and convenience. Product standards have almost universally risen. Consumer expectations have followed suit.

The public sector has struggled to catch up. It is not, in fact, true that public sector services are worse than they used to be. In many areas, there is considerable evidence of improvement: the NHS treats more diseases more successfully; schools get more pupils through higher-grade GCSEs and A levels. Greater demands often mean that improvements are even required to stand still: this is true, for example, of care for the elderly, given an ageing population, and in transport, given expectations of greater mobility. For most of the past two decades, public spending has risen more slowly than average private earnings. However, people's perceptions are based not on actual performance, but on the gap between their expectations and reality. And comparisons with the private sector have raised expectations high. So what people notice - as was widely observed in our focus groups - is that, in general, public sector services are not as flexible or efficient, and certainly not as consumer-focused, as the private services they pay for directly.

At the same time, public confidence in the political system has been in decline. This is crucial, because - as the members of our groups pointed out - taxes are not paid directly to public services. They go first to the government, and the government is controlled by politicians. Trust in politicians and parties has fallen considerably since the 1970s. In the British Social Attitudes surveys, the proportion of people saying that "the system of governing Britain works extremely well" or "could be improved in small ways but mainly works well" fell from nearly half in 1973 to around one-third in 1996. As people have become more active consumers, and their outlook on the world more individualistic, they have become more sceptical and less deferential about politics.

Such trends have profound implications for the government's new approach. "Tax and spend" on the old model is no longer good enough. People need to be "reconnected" to the taxes they pay and to the spending that these finance.

Many on the left may not like the government's "modernisation" programmes in education, local government, the health service and public transport. There is no doubt room for disagreement on methods, but of the need to improve, there can be little question. What would be fatal electorally would be if more money were thrown at these services and they turned out, a few years later, barely to have improved at all. As our focus groups made clear, this is already the impression the public has after three years of the current government; Labour will be in trouble if that is still the impression by the election after next.

But the report of the Commission on Taxation and Citizenship goes much further. It argues that taxes themselves need to be "connected" to the services they pay for. One option is to earmark, or "hypothecate", specific taxes to specific forms of expenditure. In this way, the link between what the public pay and the services they get will be much clearer. The system does not have to be formal or inflexible. For example, it was remarkable how, during the entire period of the fuel-tax protests, with callers to every phone-in programme complaining that they paid all these motoring taxes yet the transport system never improved, no one from the government pointed out that a ten-year transport plan had just been published, which provided for an enormous increase in transport spending. Making the link between the tax and the spending would surely have helped mollify public opinion.

Second, the commission argues for better information. Local authorities are required by law to provide a leaflet to all council taxpayers, setting out what they do with the revenues. Why doesn't central government do this? We found huge ignorance in the focus groups about how much was spent on different areas of government.

But such information, third, needs to be credible. Loss of trust in politicians, and a perceived prevalence of spin, has badly undermined any information provided directly by government. It simply isn't believed. An independent source of information about government spending and performance is therefore needed. The commission recommends a new public auditing body for this purpose.

Would such methods work? We think they might. However deep their alienation, the people we met had not given up altogether on taxation and spending. If they could be convinced that the money really was being well spent on the services they most cared about - health and education - a significant majority said they would be prepared to pay more in tax. It was a big if, but that is the point. Tax and spend is not enough. Today, it must be "tax, spend, improve and connect".

The potential prize is substantial. For 20 years, the Conservative Party fostered a lie: that we could maintain good public services at the same time as taxes were kept low. In the UK, the proportion of our national income that comes from taxes is 4 per cent lower than the European Union average. That's £40bn less being spent on public services than by most of our Continental neighbours. As people look around at broken railways, decrepit hospitals and failing schools, the consequences are plain to see. After six years of acquiescing to the same illusion, new Labour is finally facing the electorate with the truth - and not a moment too soon.

Michael Jacobs is general secretary of the Fabian Society. The Commission on Taxation and Citizenship's report, Paying for Progress: a new politics of tax for public spending, is available from bookshops or direct from the Fabian Society (11 Dartmouth Street, London SW1H 9BN; tel 020 7227 4900) at £9.95 plus £1 p&p

Michael Jacobs is visiting professor in the Department of Political Science / School of Public Policy at UCL and at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics. He is co-editor of the Political Quarterly

This article first appeared in the 27 November 2000 issue of the New Statesman, The rise of stealthy wealth