Leading Article: The high cost of low taxes

JOHN MAJOR wants us to be more confident about Britain in 1994. In his new year message to the Conservative Party the Prime Minister says that this country has a 'tremendous opportunity' to lead Europe out of recession. It is time, he says, to 'put the pessimists back in their box'. Mr Major is not talking complete moonshine here. Many of the economic indices and portents look good: low interest rates, low inflation, increases in productivity, and a decrease in the unemployment figures, though the last statistic, as we report on page one, is open to exploration. Share prices hit a new high last week and look likely to climb even higher. House prices are forecast to rise, which is good news for homeowners saddled with mortages worth more than their homes. For some people, the good times have already arrived; witness the pounds 1m bonuses to dealers in the City of London.

But these indications of revival tell only part of the story. For the unemployed, the new year looks less happy. For the poorest 10 per cent of Britons, real incomes have declined by 14 per cent since 1979, while rates of pay across the board have become more unequal than at any time since the end of the 19th century. These are fundamental changes in our society that rarely rate a front- page headline. Those with skills and education reap handsome rewards. Those without skills find the value of their labour dwindling. Machines can more cheaply perform routine manufacturing tasks. The miracle economies of Korea, Hong Kong and Taiwan can undercut our own labour-intensive processes, pulling up their own incomes in the process. The unskilled have to rely mainly on casual work that provides little of the security or income enjoyed by their parents.

Now the unskilled - the poor - face a new challenge from Eastern Europe. Cheap labour is already making its way from there to Western Europe, offering to paint houses, wash dishes and fill supermarket shelves at even lower wage rates. The Cold War performed a service for Western Europe's unskilled workers by confining behind the Iron Curtain competition for their labour. But today Europe has a land frontier as permeable as that of the United States with Mexico, and as explosive in its economic and social consequences.

There is another threat to our social cohesion, which comes from inside the prospering middle class rather than outside it. This is the mental drawbridge that accompanies the popular idea that low taxation is always a social good. There has never been a shortage of voices arguing that the middle classes should enjoy low tax rates: Samuel Smiles in the last century, the Tory party today. They are comforted by the argument that the poor are poor not because they are unfortunate or badly educated or unskilled, but because they are feckless, if not immoral.

For most of this century, fear of organised labour or disorganised trouble in the streets has kept the drawbridge lowered. Germany was one of the first European states to develop a welfare net because Bismarck confronted one of the best organised working classes. In France and Italy after the Second World War, the existence of substantial Communist parties did more for the willingness of the prosperous to pay taxes than did altruism or noblesse oblige. But the self-immolation of Communism and the collapse of organised labour has largely removed the need to worry about the less well-off for fear of what they might do.

If there were easy answers, Labour's Commission on Social Justice and the Liberal Democrats' commission into economic performance and social cohesion would not need to deliberate. A certain amount can be achieved by rearranging the furniture of the Welfare State: targeting benefits more generously on those who need them, clawing them back from those who don't. But the deeper question must also be addressed. Our own comfortable majority - embalmed in what J K Galbraith calls the culture of contentment - must begin to realise the consequences for their own lives of allowing a growing, uneducated and unskilled minority. What is the freedom to spend your own money if it is merely the freedom to pay soaring insurance premiums because the police can no longer cope with crime? Or to buy education because the state's schools have become holding patterns for delinquents? Or to drive your daughters home at night because public transport has become dangerous even when it works?

These are now everyday decisions, and they are not happy ones. We take them because our politics refuses to clarify the big choice. If it goes on doing so, we will wake one day to find a fearful landscape that no one has designed or wanted.