Expert View: A Lib-Lab pact would be too much Seventies nostalgia

Screaming schoolgirls and election campaigns don't usually go hand in hand. Yet this was what happened last week in the unlikely setting of Ilkeston, Derbyshire. And the even more unlikely recipient of this hysteria was our own dear Chancellor.

Screaming schoolgirls and election campaigns don't usually go hand in hand. Yet this was what happened last week in the unlikely setting of Ilkeston, Derbyshire. And the even more unlikely recipient of this hysteria was our own dear Chancellor.

It would be nice to think that the schoolgirls' euphoria was in some way an illustration of the local education authority's success in raising financial literacy. For as Gordon Brown has not stopped telling us during this campaign, there is an awful lot in the Government's economic track record to shout about.

Since 1996 the economy has expanded by more than £200bn - a 24 per cent increase in constant prices. Among the developed economies, only the US has bettered our own performance, and we have left our fellow Europeans behind.

This should matter to voters, for the expansion under Labour has created two million new jobs and brought unemployment rates down to the lowest for a generation - the same with inflation and interest rates. This prosperity, in turn, has permitted the biggest expansion of the NHS since it was first established, together with significant investment in education.

That is why the Government has made the economy central to its campaign, and sent out Mr Brown to strut his stuff. It is also why most forecasters still expect Labour to romp home with a good majority.

But as the election focused on Iraq last week, some City strategists were forced to dust off their "what if?" scenarios, based on disaffected Labour supporters voting for the Lib Dems and delivering a coalition - or even a Tory victory.

One of the more frightening scenarios I have been playing with is what a Lib-Lab coalition might mean for fiscal policy. For the one area where Mr Brown's record is looking decidedly under pressure is public finances. Most City economists are predicting that, after the election, he will need tax rises from somewhere - probably another penny on national insurance and a further squeeze on corporation tax.

But in a Lib-Lab coalition, he could be tempted to pick from some of his partners' proposals. The Lib Dems are putting forward two radical tax increases: a top rate of 50 per cent, and the replacement of the community charge with a local income tax. What would they mean?

The most disconcerting thing about the local income tax is that the headline 3.75 per cent rate is stated as being the average level anticipated. The Lib Dems admit one in four people would be worse off - but for the unlucky couples earning over £42,000 jointly, and living in a high-spending borough, how much worse off could that be?

As for the top rate of 50 per cent, my heart sinks as I think back to the disasters wrought on the UK economy the last time we adopted a high tax policy, in the 1970s.

Charles Kennedy, it would be even worse now. In a global, knowledge-based economy, the preservation of international competitiveness for skilled labour is vital. Every other big economy is cutting income taxes; at 50 per cent, we would have a rate higher than not just Japan and the US, but also France and Germany. Consider the effect on disposable incomes (especially after the mortgage). You would increase evasion, lead to a brain drain, and end up pushing the tax take down.

Besides, it is nonsense to suggest Labour has failed to redistribute wealth, when (according to the Institute for Fiscal Studies) net incomes for the top fifth of earners have already fallen 4 per cent, and the bottom fifth have seen a rise of 10 per cent.

Whatever the outcome of this week's general election, it is not difficult to feel depressed. But my worst nightmare would be a tax-and-spend coalition. Then we really would be sleepwalking back to the Seventies.

christopher.walker@tiscali.co.uk