BBC On The Record - Broadcast: 04.11.01

Film: PAUL WILENIUS looks at whether taxes will have to be increased to pay for the war on terrorism.

PAUL WILENIUS: Britain's resilient shoppers are fighting on a new type of front line. And up to now they've been winning. By hunting down pre-Christmas bargains, they've been helping the economy. But the noise of battles in a distant lands is starting to echo through the nation's High Streets and Malls. And the fear is, it might keep the consumers away. This month in his pre-Budget Report Gordon Brown will give his first detailed assessment of the impact of September the eleventh, on the British economy, and also his public spending and tax plans. But the signs aren't good, as there is growing evidence that the shock-waves from the terrorist attacks is beginning to be felt in the UK. The steep downturn in the American economy and in Europe, looks certain to affect Britain, already anxious about the impact of the war. Although the US economy was slowing before the attacks, now consumer spending is dropping fast, manufacturing is falling sharply, and almost half-a-million Americans lost their jobs in October. DIGBY JONES: If you are in manufacturing exporting, if you are looking across the Atlantic to your market, then it is very difficult indeed, in fact a lot of business is saying they have a big problem there. And then in specific sectors, such as airlines, such as in aeronautical sector, they are having very, very specific problems indeed. Now all of that's coming through in our survey which is that it is very, very difficult, but it is not across the piste completely disastrous everywhere. WILENIUS: Britain's economy has already taken a heavy knock, according to a CBI industry survey which will be released later today. The British Airways gleaming flagship, Concorde, will return to service this week. But the future of British businesses like manufacturing is less certain. Even the normally resilient service sector including advertising, PR, tourism, and banking is suffering. And house prices are slipping. DOUGLAS McWILLIAMS: In the UK the initial effects were relatively little, we had strong retail data for September and it's only now that we're starting to see confidence declining and we're starting to see some evidence that businesses are stopping spending, but up until now the net impact on the UK, okay the situation wasn't all that great, but the net impact on the UK has been fairly minor. I think in the next six to nine months' we're going to see it intensify. WILENIUS: The airlines hit hardest by September the eleventh, are those which rely heavily on business customers, like British Airways. But the cut-price operators are still finding lots of passengers looking for cheap flights and have so far suffered less. Many companies dependent on consumer confidence, are still holding their own. Sales have held up and for some profits are healthy. But there are growing fears there could be difficult times ahead. JONES: God bless 'em, the consumers of Britain are still out there, in a way saving the economy right now, and, and that is one of the most important factors as we move into the Christmas season. I think this is probably the most important Christmas in that respect for many, many years. McWILLIAMS: Consumer confidence has been very buoyant but it started to fray a bit at the edges, the latest data shows it's starting to drop now and it's likely to drop further. WILENIUS: What does this all mean for the Treasury's public finance plans? Even before the war on terrorism, there were fears that if public spending kept on increasing at the same rate beyond the year two-thousand-and-three, then Gordon Brown might have to put up taxes anyway. But now with growing demands for more money for defence and home security, this will put him under even greater pressure. ANDREW DILNOT: If we were to move in the future away from a world where defence spending was falling as a share of national income, to a world where it wasn't only stable, but rising, then that would be a new call on resources that otherwise might have gone to health, education, transport, and I think that makes what was already a very difficult set of choices for the government, beyond two-thousand-and-three, potentially more difficult still. WILENIUS: The heightened security around airports like Heathrow has added to the mounting cost of protecting Britain's citizens from terrorists. But the extra bill for immigration, the security services, and emergency planning, on top of the cost of fighting the war, is growing fast. So are the demands for more cash from the Treasury. BRUCE GEORGE MP: Either money will have to be transferred from existing budgets or an addition, some additional monies will have to be found because the first obligation of any government is to defend itself. And although there are many other enormous demands on an inadequate budget to provide safety and security is in my view the highest demand on on spending. JOHN McFALL MP: I've no doubt that there will be upward pressure on public spending both in the defence field and in the Home Office field in the defence for the support of the forces in this terrorism which as Geoff Hoon, the Prime Minister and others have said, could go on for a very long time. WILENIUS: For airlines like governments, tight control of business and finances is vital. Voters have been promised big increases in spending on health and education. But with new bills coming in for defence, foot and mouth, security and Railtrack, Gordon Brown has less money than he hoped for. Yet continuing with these large public spending rises, even after two-thousand-and-three, is important for many in his party. FRANK DOBSON MP: It will certainly be necessary to continue to spend an increasing amount on health and on education if we're producing from the medical schools far more doctors than we've produced in the past and that will be the case by then, then their, their wages will have to be paid. So there will have to be increases in spending. McFALL: I think it's sacrosanct that we maintain the commitments that we've given to spend on public services so I don't think there is any resigning from that. Whether the Chancellor can do that over the economic cycle from the resources he has at the moment, or whether he has to think on tax increases is another matter. That won't face us until two-thousand-and-three but I am very firm on the belief that we have to maintain our level of spending. DILNOT: I think by the end of this three-year period, the government will have just about got to the level where borrowing is as high as they can tolerate. So if they want to see spending on health, on education, on transport and maybe now even defence, rising as a share of national income, then they're going to have to look to tax increases. WILENIUS: To win over the support of voters like these at this Shopping Centre in Essex, Gordon Brown made a firm promise not to put up the basic income tax rate. Although his room for manouevre on stealth and business taxes is limited, he hasn't ruled out dropping new changes to National Insurance, tax allowances or even other less visible taxes, on an unsuspecting public or business. McWILLIAMS: He's going to have to raise taxes and it seems to me that the way the numbers are going there's going to be a lot of pressure for him to raise taxes, maybe even before two-thousand-and-three but certainly definitely after two-thousand-and-three. JONES: It is important of course that if he comes back for taxes he doesn't come to business for them, because in the last four years he's taken twenty-two-billion pounds more out of business than in the four previous years. And business needs all the help it can get right now and to come back for more taxes just would not be in any way helpful to enhancing both productivity and the efficiency of business. WILENIUS: For any government, there's never a good time to put up taxes. But in the midst of war, it could be easier to persuade the British public to swallow this bitter pill. DILNOT: We do tend to see tax increases during time of conflict, and there's I think little doubt that when there is some kind of conflict going on, the community as a whole tends to feel happier about paying more. So it's possible that we might see this as an opportunity to raise some tax that might come in useful in the future. McFALL: Well a number of seasoned commentators have indicated that any government that finds itself in the middle of a war, doesn't usually have a big hurdle to overcome to emphasise to the electorate that this has to be paid for, so I suppose there is a case at the moment for saying that we can come out with such a statement. WILENIUS: This week Concorde, much loved by top bosses, will finally take to the skies again. But the fear is with business facing a downturn, now could be the worst time to take money out of the economy by putting up taxes. And business leaders are already calling on the Bank of England to put more money in, to give the economy a boost. JONES: It is important everything is done to keep that consumer spending, and in that respect we are calling on the monetary policy committee at the Bank of England to cut by a half a percent the interest rate next Thursday and it is important that they recognise the seriousness of the situation, that across every sector, across those exporting, across those who are supplying within the economy in Britain, into those who are supplying the high street, it is important that we keep the wind in the sails of the economy now - not looking at it in a couple of months time and thinking I wish we had. WILENIUS: On Wednesday Tony Blair will fly on a special mission to Washington on Concorde to consult with President George Bush, on his difficult trip last week to the Middle East, and the war. Both men will also consider the worsening economic news starting to sweep across the West. Everyone will be waiting to see if that meeting can do anything to lift anxious spirits back home.
NB. This transcript was typed from a transcription unit recording and not copied from an original script. Because of the possibility of mis-hearing and the difficulty, in some cases, of identifying individual speakers, the BBC cannot vouch for its accuracy.