SOME Budgets stick in the mind longer than others. Looking back, they were often the first that a Chancellor delivered, and often failed to turn out quite as intended.

Jim Callaghan’s 1965 package, the first full one by a Labour Chancellor for 14 years, introduced an array of new taxes, including capital gains tax and a new corporation tax designed to discourage dividends. A year later came the bizarre selective employment tax, designed to favour manufacturing over services. All had perverse consequences that had to be unwound by future Chancellors.

In 1979 Sir Geoffrey Howe slashed the top rate of income tax to 60 per cent and financed this by virtually doubling VAT, fatally undermining his antiinflationary money policy. Two years later, he had to change tack in the famously harsh 1981 Budget. The two can in part be blamed for keeping unemployment high for two decades, pushing the objective of a low-tax economy into the future.

Nigel Lawson’s first attempt, in 1984, deserves to be remembered for the right reasons. It started a programme of reform, particularly of corporation and income tax, designed to cut rates for all by getting rid of allowances for some. The Cabinet did not allow him to touch pensions, which in hindsight was a pity. In revenge he later taxed pension fund surpluses of more than 5 per cent, making them vulnerable to later attacks, then overdid tax cuts in 1987.

The Budget unveiled by Gordon Brown in 1997, after 18 Conservative years, was certainly his most memorable. It contained his best reform: putting interest rate decisions in the hands of the Bank of England with a clear inflation target. It established his reputation for prudence by sticking to the low but outdated public spending projections left by the Tories. Together, these helped to bring years of economic stability. Sadly, 1997 also brought two of his worst measures. The revenge tax on privatised utilities was so over the top that it far exceeded the cost of the spending programmes it was supposedly levied to finance. It also hastened the financial failure of three of the companies, at vast extra expense to taxpayers.

The malign outcome of the £5 billion-a-year tax on pension funds’ dividend income has turbo-charged the decline of guaranteed private sector pensions and is still unfolding. The tax was put in to fill the structural Budget deficit left by Kenneth Clarke, although it was spun as a scheme to promote business investment.

Aside from leeching cash meant for pensioners, the tax statistically accounted for the later underperformance of UK shares. It made bonds relatively more attractive and led to a sharp drop in UK shares. It created fund deficits that now make make many UK shares more risky and volatile. Takeovers by foreign companies and tax-blessed private equity vehicles have mushroomed and pension funds demand ever higher share buybacks to restore returns. These deficits, buybacks and cash takeovers have stymied the investment that the tax would supposedly encourage.

Frustratingly, Mr Brown’s subsequent, forgettable Budgets have let public finances slip back into structural deficit. There is probably a £10 billion annual gap to be filled by raising taxes or cutting spending. The next spending round is intended to do the trick after 2008 but it is harder to make cuts when they can no longer be blamed on previous Chancellors and when you claim that the economy is in great shape.We shall not hear much of this when Mr Brown stands up to deliver his usual avalanche of self-praise on Wednesday. Nor shall we hear of all the other things that a fresh Chancellor with a more objective view of the state of public finances would need to consider.

Tax simplification has been reversed, bringing ever more complexity, more avoidance and more measurers to close loopholes. The Chancellor has revived the notion of good taxpayers, who are indulged, and bad taxpayers, who are punished, creating a new era of huge economic distortions.

Corporation tax needs another Lawson-style reform to make the rate competitive again. So does inheritance tax, which is still treated as a penal tax on the rich, most of whom avoid it by using approved exceptions. Local government finance is in an even bigger mess than when the Tories left.

The national debt, nominally still near 40 per cent, is probably more than 100 per cent of national income on honest accounting, and state pensions are heading for the higher lunacy of the Turner report. The Treasury needs change at the top as desperately as Mr Brown does.

graham.searjeant@thetimes.co.uk

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