When will New Labour face up to the truth about taxes?

"SHOCK! HORROR! Train fares to rise by 21 per cent..." Yes, it's that grim time of year when our privatised rail companies announce their fares for next year. The annual ritual has become as familiar as the switching on of Christmas lights in high streets around the country. For 11 months of the year, there are reports highlighting the appalling train services endured by travellers. The year's end is greeted with news of huge fare rises. Here we go again?

Not quite. The story is more complicated than the perennial tales about bungling privatised companies seeking bigger profits.

Of course, no one in their right minds would leap to the defence of the millionaire incompetents who run these services. With their excuses about the "wrong type of snow" and the like, the rail bosses convert me to fleeting advocacy of capital punishment, maybe commuted to enforced incarceration on a train from London to Blackpool, something that would take up most of the rest of their natural lives. But a much wider question has to be asked of those fare increases: what did we expect?

For there is a blindingly obvious connection between the amount the government is willing to spend on train services and the level of the fares. If the subsidy shrinks there is only the fare-payer to make up for the shortfall. No doubt there are savings to be made through efficiencies, and quite clearly the old nationalised British Rail was no model on which to base a decent service. But in the end there is no getting away from it. In France and Germany governments spend more on trains so the fares are lower and the services are more reliable. In Britain we have opted for a system where the fare, which takes no account of a person's ability to pay or the benefits to road users from travellers opting to take trains, has replaced higher government spending.

This, along with less than inspired management, is why Britain has a shambolic privatised railway network. It stands as a totem to the country's inability to have a mature debate about taxation and spending. The former Conservative transport minister, Stephen Norris, has admitted as much. He suggests that the main reason for his support of rail privatisation was despair at the prospect of getting any more money out of the Treasury. Either a publicly owned system withered through lack of funds or they handed it over to the private sector. But why were there no funds? Because the ground was being prepared by the Major government for pre-election tax cuts.

This has had an intriguing and irrational side-effect in Britain's hysterical debate about Europe. The most wooed voters in the world, the Middle Englanders, head for France for their holidays. There they are impressed with the efficiency of French trains. Then they return to Britain, phone up Nicky Campbell on Five Live to declare that the rest of Europe is jealous of the British way of life and wants to take it over. The next day they head for Calais because prices in supermarkets are much lower than in Britain. Well Middle England, the British supermarkets would not be able to get away with it if Britain was in the euro. The differences would be too transparent.

The row over Europe that erupted last week will do so again this week, when William Hague will be dusting down the questions he would - and should - have asked Tony Blair in the Commons last Wednesday before he decided the time had come to defend his hereditary peer. Indeed it is because Europe has now become linked with tax that Hague is actually on potentially fruitful territory. When it is Europe alone the Tories always risk another bout of internal fighting. But on tax and spend the party of the right is united.

Tony Blair and Gordon Brown neutralised tax as an issue at the last election by taking the drastic step of pledging not to raise income tax for the whole parliament. This was a shrewd move because income tax had become an irrational symbol in British politics, as if all that mattered was a party's attitude towards it. As Michael Meacher pointed out in an interview with me a short time before the election, there were plenty of other ways of raising taxes.

The reason the spin doctors reacted with horror to Meacher's endearing candour was that he happened to be right. With considerable stealth, the Treasury has found other cash-raising measures. However, there is a limit to the number of times that Gordon Brown can find discreet ways of doing this, a privatisation here, a tax on pensions there.

This is what prompted the Fabian Society, to set up a commission under Lord Plant to review Britain's tax system. Downing Street was not pleased at the news, which shows how primitive our debate on taxation remains. The prospect of Lord Plant declaring that some taxes may have to rise sends shivers down Blairite spines. But the commission will not be recommending a reversion to "Old Labour" policies of interventionism in failing industries or excessive spending without accompanying efficiencies. It may recommend other ways of raising tax in order to fund a modern welfare state and other services. If Britain could only have a rational debate, no one should be afraid of that.

To some extent Brown has moved the debate on from the pre-election madness. He talks now of a "tax and invest" strategy, which implies that taxpayers will get something back for their money. This is why the reforms in education and health are important. Crucially, voters need to see tangible improvements to accompany the cash pumped into these services.

But the debate is still at a desperately early stage. How will Labour respond, for example, to the following scenario? In January 2001, months before a likely election, the shadow chancellor Peter Lilley, goes on the Today programme and announces that a Tory government would cut the basic rate of income tax by 2p in the pound to be paid for by cuts in the social security budget and other efficiencies. William Hague declares: "We prefer to let the voters decide how to spend their money, rather than a nanny state and Tony's cronies spending it for them." Unless the debate matures a little in the coming years, Brown may feel obliged to follow suit and take part in a tax-cutting auction. It is too late to do much about the railways. They were privatised long ago, but other services demand levels of spending which should rule out such an option.

There is, though, a twist to the hysteria of recent weeks. While Blair and Brown are right to challenge the excesses of Oskar Lafontaine, it is just possible that Europe will provide a camouflage for some necessary tax increases in the years to come. If we are limited to taxation by stealth, we might as well let Brussels, if not our trains, take some of the strain.

Steve Richards is political editor of the `New Statesman'