Britain's Tax Hikes Seen as Politically Risky

The opposition Labour Party says the increases will put a stop to the country's economic recovery

KENNETH CLARKE, Britain's chancellor of the exchequer, will be studying government statistics with unusual care in coming months.

He will want to know what impact a number of personal tax increases, which take effect April 1, will have on the recovery now discernible in the British economy - and what the political fallout will be for the ruling Conservative Party.

The opposition Labour Party says the new tax regime - the toughest since World War II - will halt the recovery in its tracks. Mr. Clarke, who admits he would like to be prime minister one day, says he is confident that the recession is over and that economic growth will continue. He concedes, however, that the recovery will likely slow down.

The tax hikes include a value-added tax (VAT) imposed for the first time on domestic heating and power; a freeze on income tax allowances; and a sharp increase in workers' national insurance contributions. The measures result from two budgets last year, both aimed at curbing Britain's massive national debt.

The first budget, delivered by Norman Lamont before he resigned as top Treasury minister, set out to reap 6.3 billion ($9.4 billion) in new taxes in 1994-95.

Clarke's follow-up budget contained a further 2.6 billion in tax increases for the same year. The chancellor also promised additional tax increases of 5.6 billion in 1995-96. Clarke concedes that the measures are unlikely to make him popular in the short term, but before deciding on Draconian increases, he says he had to weigh the likely cost of leaving things as they were.

Prime Minister John Major's government each week spends 1 billion more than it earns. Doug McWilliams, an independent economic analyst, says ``tough measures were needed if borrowing was not to spiral out of control.''

Government ministers privately concede that there is an element of considerable risk in Clarke's tax strategy. Most economists agree that the recovery now under way is led by consumers. Unemployment is steadily falling from its peak of 3 million, not because of new investment (government figures show it to be falling) but because, at least until last Christmas, people have been spending more.

Clarke's budget appears to have given British citizens a lot to think about. Home loan companies this month reported personal savings falling off. In January, when main-street stores stopped offering pre-Christmas bargains and raised prices, their sales figures began to drop.

This suggests that the current consumer-led recovery may, at the least, be hampered by the increased tax burden Britons will have to carry in the next two to three years.

That period will coincide with the run-up to the next general election; therefore, if the Clarke strategy fails, the government is likely to pay a heavy political price.

One of the greatest electoral risks in the strategy is the imposition of VAT on domestic fuel. Britain is already the most reliant of the Group of Seven countries in terms of indirect taxes. Unlike its partners in the European Union, it has refused until now to tax household expenditure on energy. But starting in April, an 8 percent VAT will be levied on electricity and gas bills. A year later, the rate will double.

Many Conservative members of Parliament say the new energy tax is deeply unpopular. Last year, the government was forced to agree to make special payments to pensioners and other senior citizens who were unable to meet the new charges.

The Labour Party says the payments will not cover the VAT increases, however. Gordon Brown, Labour's ``shadow'' chancellor, has attacked VAT on fuel as ``socially unjust.'' Gas and electricity companies this month reported a surge of advance payments of domestic fuel bills by people eager to avoid paying VAT.

Clarke says the new tax regime, coupled with tight curbs on public spending, will shrink the government's borrowing of nearly 8 percent of gross domestic product to under 3 percent by 1996-97. He also claims that inflation of less than 3 percent, as well as flexible rules on investment, will encourage foreign companies to pump money into the British economy.

But if the best hope of sustaining the recovery is still consumer spending, some of the statistics the chancellor is reading might worry him.

In the early weeks of this year, the rate of growth in retail spending fell from 4 percent to 3 percent. A Gallup Poll this month showed four out of 10 Britons expect their household finances to get worse when the tax hikes start to bite.