Tax grab that’s come back to haunt Brown

CHRIS FISHER, EDP Political Editor

As political fuses go, the one on Gordon Brown's abolition of tax relief on dividends paid into pension funds is pretty long.

He announced the move in his first budget in July 1997. It was controversial at the time. But the new Blair government was then in the early stages of a very lengthy political honeymoon, and the criticism from the Tories and pensions experts had little impact.

Every so often since then the chancellor has been told that he made a big mistake that has cost pension funds and their beneficiaries a fortune (of about £4bn a year). But the story has never really taken off.

Now, however, it is threatening to explode under the chancellor only a few weeks before his expected takeover from Tony Blair. Why? Partly because after a two-year battle, the Times newspaper has secured Treasury papers confirming that Mr Brown was warned of potentially serious consequences if he hit pension funds as he was proposing to.

It got them last Friday. That was a day after the Commons had gone into its Easter recess, and there will be no opportunity to debate their contents in the House before its return on April 16. It was also a day when Mr Brown was away - in Afghanistan. The trip was aimed at strengthening his credentials for the prime minister's job. But his conspicuous absence at a crucial time will actually have reinforced the belief that he is like Macavity, TS Eliot's mystery cat who always went missing when there was serious trouble. Former cabinet secretary Lord Turnbull recently drew attention to this feature of Mr Brown's persona - when also accusing him of employing “Stalinist ruthlessness”.

Mr Brown has also been extremely reluctant to speak about the pension fund papers. He has been strongly defended. But whom are these words coming from? As Lord Heseltine might put it: It's not Brown, it's all Balls. As the manure has gone on hitting the fan, the chancellor has kept his head down and left Ed Balls - for many years his main adviser, but officially well down the Treasury's ministerial list - in the firing line.

One of Mr Balls's main arguments was that Mr Brown took his decision on the advice of civil servants. “It was made clear that pensions funds would be the gainers in the future, that the claims that this would leave a hole in the finances were unrealistic,”he said.

In truth, not all of the advice from civil servants was contrary to the step Mr Brown took. He was given four Treasury papers on the subject after becoming chancellor. As was to be expected, they set out a range of possible outcomes. They also said that their predictions did not carry complete certainty, but a hope was expressed in them that pension fund losses caused by the removal of the dividend credit might be offset by rises in share prices. All of them warned, however, that pension fund values would fall, and one of them pointed to a drop of up to £75bn.

There has also been an attempt by the government to say the CBI supported the pension fund move. “In 1996 the CBI said to us that 'you haven't gone far enough… you need to act in a decisive way in the long-term interests of British companies and British investment' and we did that,” said Mr Balls.

But this has been firmly disputed by Lord (Adair) Turner, who was director general of the CBI at the time. He stressed yesterday that it had never pressed for the pensions change.

So, arguments that a serious error was made in the first place are being accompanied by accusations that Mr Brown has been deceitful and cowardly about the background to the decision and that he has been trying to spin his way out of trouble.

Some of this has been coming from the Labour side. Former welfare minister Frank Field was busy yesterday telling the media that the pensions move raised more doubts about Mr Brown's judgment and suitability for the post of prime minister. And the concern expressed by him, Charles Clarke and Alan Milburn, among others, has been spreading as opinion polls have been signalling that Labour is in danger of replacing a three-time election winner with an electoral loser.

The only declared challenger so far to Mr Brown for Mr Blair's job is left-winger John McDonnell. But the damage being done to Mr Brown by the pensions disclosure was generating new expectation and hope that someone of greater political stature - environment secretary David Miliband, home secretary John Reid, work and pensions secretary John Hutton, or Charles Clarke - will also stand.

What should the Tory tactics be in this? Are they convinced that Mr Brown would make a bad and decidedly beatable prime minister? If they are, shouldn't they be hoping, from a party political position, that he gets the job?

If so, shouldn't they be holding back, rather than pitching in, at the present? By the same process of logic shouldn't there be more resolve, and fewer ifs and maybes, from those in the Labour Party who believe that a Brown premiership would be a prelude to a general election defeat?­

WHAT HE SAID

“The present system of tax credits encourages companies to pay out dividends rather than reinvest their profits. That cannot be the best way of encouraging investment for the long term, as was acknowledged by the previous government. Many pension funds are in substantial surplus and at present many companies are enjoying pension holidays, so this is the right time to undertake a long-needed reform. The previous government cut tax credits paid to funds and companies, so with immediate effect I propose to abolish tax credits paid to pension funds and companies.”

- Gordon Brown, in budget statement of July 2, 1997.