Sorry, Mr Hague, but you're fighting the last election again

HAS WILLIAM Hague at last found a cause - other than the Euro - to excite the electorate? By hinting strongly at cuts in the higher rate of tax, has he found the issue with which the Conservative Party can start to reoccupy middle England?

Well, he is certain to playing to one of his party's strengths - its formidable, if not uniformly accurate reputation as the tax-cutting party between 1979 and 1997. Secondly, Gordon Brown has increased some indirect taxation as part of his bloodless redistribution, even if many of the so called "stealth taxes" have followed an agenda started by successive Conservative Chancellors - from the abolition of mortgage interest tax relief to the curbing of the pensions industry's tax privileges. Finally, and most crudely, the Tories are never going to win an election promising to spend more than Labour; they just might by promising to tax less.

At first glance, however, it appears unlikely that his musings on the top rate will have this effect. Cuts in the top rate do not much excite those who don't pay it in the first place. Even allowing for the important fact that many who don't pay the higher rate may aspire to one day, those that do not qualify remain a very large majority - about 90 per cent of taxpayers in fact.

But then Mr Hague would argue that the burden of the top rate fell heavily on a group of employees - such as head teachers and the highest-paid nurses - who could not possibly be called rich, but are eligible just because they earn more than pounds 28,000 a year. As he pointed out, the number paying the higher rate more than trebled since a mere 674,000 paid it 20 years ago. And as he didn't need to point out - other than subliminally - that many of those at the lower end of that group are floating voters.

This is a valid and quite familiar point - but with only limited dividends for either of the main parties. On the one hand, it was made several times by Tony Blair when he was Leader of the Opposition; but his Government cannot claim to have done anything much about it since then (though, given advance warning by Mr Hague's intervention, it has plenty of time to do so before the next election, if it chooses). On the other, easily the largest share of that very big increase in the number of higher rate payers occurred while the Tories were in power, much of it when Mr Hague was a minister.

But in any case, this is an argument not so much for reducing the rate but for raising the threshold to take some of those middle-income groups out of higher rate tax altogether. It only becomes an argument for reducing the actual rate if it can also be shown that reductions in the rate were, like the previous cuts in the higher rate, significantly offset by increases in tax paid as evasion fell and ambition increased. It is hard to find a tax expert who thinks that reductions from a rate of 40 per cent would have that effect.

There are two other negatives in Mr Hague's intervention. One was tactical; it threatened to overshadow a much more closely argued case put by his Shadow Chancellor Francis Maude yesterday that Mr Brown's tax changes has helped to reduce the percentage of income set aside for savings from 10.6 per cent in the second quarter of 1997 to 5 per cent in the first quarter of 1999. There will be endless argument between the parties over whether the reduction in interest rates during that period was or wasn't the main factor. But Mr Maude has at least constructed a line of attack rooted in traditional values of Tory thrift.

But the other is more serious. By choosing to focus on higher-rate payers, Mr Hague has failed to project the party's tax-cutting appeal beyond Middle England to the working poor and nearly poor. If he was determined to revisit the tax issue, he could have raised the much bigger question of whether it is sane that several million families pay tax and qualify for social security benefits. He could have proposed that much larger numbers of lower-income groups be taken out of tax altogether, encouraging all those impeccably Tory values from individual dignity to entrepreneurship. Instead he played into the hands of a Labour Party determined to present itself as the party of fairness over the next two years, by being the champion of the better off.

Which is a pity. For, lurking in the subtext of yesterday's inter-party skirmishes, is a real, and as yet largely unresolved, ideological challenge for Labour. Yesterday, Mr Maude was outstandingly clear in defining the new post-Major/Clarke Tory agenda as that of shrinking the state and, by implication, clearly increasing the private purchase of health care and education. Or, as he chose to put it, a choice between Tories, "who want sturdy independent Britons with the education and encouragement to live their lives to the full and look after themselves", and Labour, "which is still convinced that only the state has the foresight to plan for the future".

You don't have to swallow this crude caricature wholesale to recognise that Labour is facing some real dilemmas ahead. It's true that there isn't a crisis. For all Mr Hague's emphasis on tax, public spending as a share of GDP remains low by European standards and middling in the global league of industrialised countries. Moreover, having read the economy better than any of his critics - and many of his allies - were prepared to credit at the time, Gordon Brown could well end up with the benign conditions to increase spending and reduce taxes in the run-up to the next election. But that postpones rather than resolves some big questions. Demands on public spending are not exactly going away. Gradually the Chancellor is using up the methods of tax-raising inherited from his predecessors; to meet demands for health and education, not to mention transport or long- term care of the elderly, there will have to be some choices, if only in the next and perhaps subsequent parliaments.

Having shown that it can be trusted by the taxpayers with their money, can - and should - a modern left-of-centre government then go ahead and persuade the taxpayers that some clear increases in personal taxation are needed to pay for the kind of society we all want to live in?

And can it successfully argue that the better off should pay more in order - for reasons of enlightened self-interest - to prevent the kind of crime and social exclusion which makes their own lives less pleasant? Is the left robust enough to confront the tax-cutters head on? Or will it, too, facing tax-cutting competition on the right, countenance the thought of more private provision, at least on a wide margin of the public services? What, in short is the right size of the state in a modern social democracy?

Mr Hague was no doubt trying, in his way, to expose this dilemma. But he distracted attention from it by reliving an old battle about the higher rate of tax.