Election '97: The truth about health

There is a hole in the government finances. It is the chasm between our wish to pay American-style taxes and our preference for a European- style welfare state.

The two main parties have both lashed themselves to each horn of this dilemma. The resulting pain need not be immediate; there is less danger of big tax rises in a budget in July or November than of the slow crumbling of key public services - such as health.

The Tories and Labour played a game of fantasy budgets yesterday. Would Labour have to raise pounds 12bn to pay for employment schemes, and lower VAT on fuel? Or would the Tories have to find more than pounds 15bn to abolish inheritance tax and boost Britain's cadet forces?

It was a bitter row, with John Major plainly accusing Tony Blair of lying. But it is the kind of row you have with your spouse over how to spend your lottery winnings when you never even buy a ticket.

Yesterday's political pantomime coincided with a fresh call from business for higher taxes. The British Chamber of Commerce said the penny cut in the basic rate of tax that has just come into effect should be reversed. David Richardson, its president, said: "The last thing any government should ever do if it is trying to manage the economy effectively is to box itself in in this way."

But they are boxed in. All of the dividend from the strong economic growth expected this year and next will be needed to close the excessive gap between tax revenues and government spending. The reduction in borrowing will also depend on meeting the ultra-tough spending targets accepted by both Labour and Conservatives. As the Institute for Fiscal Studies has pointed out, the planned growth in expenditure in the next three years is lower by far than the average rise during any parliament of the past 80 years.

The menu of options for a government that wanted to raise more revenues without increasing income tax rates is long. It includes higher taxes on companies, cutting or axing tax reliefs like mortgage interest relief and increasing VAT.

Andrew Dilnot, director of the IFS, said that the crunch would come in a few years' time, with - yes - the National Health Service being the main pressure point. But by then the gap between the kind of health service we want and the kind we find ourselves living with might be too big to close.