Leading Article: A failed philosophy

THESE surely are the final months. As crisis succeeds crisis, as one bungled 'fightback' speech succeeds another, John Major's departure becomes a question of when and not if. But this is not really his crisis. It is the crisis of the political philosophy that has dominated the country since 1979. That philosophy argues that government is an imposition on people and that human happiness is always in inverse proportion to levels of income tax. And that philosophy is bankrupt. A change of Tory leadership - a buccaneering Clarke, a statesmanlike Hurd, a visionary Heseltine instead of a limp Major - will only to expose the bankruptcy more clearly.

'We must restrain public expenditure,' Mr Major told the Welsh Conservatives last week, 'because we are bound by the laws of arithmetic.' But this is a special Tory arithmetic. The budget deficit is approaching pounds 50bn, and will remain substantial even when economic recovery improves revenues and reduces benefit payments. Leaked Whitehall papers suggest that ministers are considering cuts of pounds 5bn a year in social security. This is almost exactly the combined sum lost in revenue by, first, the Tory cut in the top rate of income tax and, second, the Tory introduction of the 20p tax band.

At last, voters are beginning to see that the arithmetic does not add up. Low income tax does not lead automatically to greater contentment. And the losers from spending cuts are not confined to those on the 'little list' about which Peter Lilley, borrowing from Gilbert and Sullivan's The Mikado, burst into song at the last Tory party conference. ('There's those who make up bogus claims/ In half a dozen names/And councillors who draw the dole/To run left-wing campaigns.') Voters may, in the short term, have more money in their pockets. But, equally, they may find that the local public library is closed, that their train service is cancelled, that the police station cannot respond to a burglary, that their child's school is short of books and their local hospital short of beds. They may further discover that, when they are sick or unemployed or disabled or retired, reductions in state benefits give them less money in their pockets.

The argument for lower taxation, however, is based not only on the view that people prefer more choice about how to spend their money but also on the premise that, in a mobile and competitive world, governments have no alternative. If British tax rates are too high, multinational firms can relocate abroad. Likewise, skilled workers and qualified professionals will take their labour elsewhere. But the attempt to use low tax rates as a form of price-cutting in the international market-place may also prove subject to diminishing returns. As the authors of a pamphlet on taxation, published tomorrow by the new independent think-tank, Demos, puts it: 'Excessively low tax rates can frighten off investors as effectively as high marginal rates if they result in disorder and under-production of public goods . . . Transport, good schooling and health care, cities without bombs, neighbourhoods without fear - all these are part of modern production.' They quote the example of Ford's recent decision to invest dollars 1bn in a lorry plant in Ontario, which offers better social provision against the lower costs of the US and Mexico.

There is one final sense in which the anti- taxation ideology of the 1980s has failed. It has not produced lower taxes. The growing numbers of old people, working poor and unemployed; the voracious demands on health services; the rising costs of maintaining law and order - these have combined to keep tax revenues well above 40 per cent of gross domestic product. The burden has moved from direct to indirect taxes, such as VAT - and from rich to poor and from the corporation to the individual.

Now, ministers are trapped. They dare not raise VAT further, for fear of wrecking their counter-inflationary policies. They dare not erode universal benefits, such as old-age pensions, because they have promised not to do so. So they chip away at benefits, such as invalidity benefit, that are already 'targeted' on the poor and sick. The prospects of better schools, better training, better hospitals recede further still. The Tories may need a new leader. Far more important, they need a new arithmetic, overturning the false anti-tax theorems of 14 years.