Think-tank calls for radical tax reforms

As the row over Kenneth Clarke's tax "dawn raid" on executive share options intensifies, the think tank Demos is calling for a radical overhaul of tax policy.

As part of this, governments would "eschew the drift towards more arbitrary and retrospective taxation" - exactly the grounds on which the removal of capital gains tax relief on executive share options has been criticised.

After a weekend in which Treasury ministers and officials met at Chevening, Kent, to start planning the November budget - in which tax cuts are widely anticipated despite heavy Government borrowing - Demos warns of the danger of repeating the fiscal errors of the late 1980s and early 1990s. "While the Conservatives look likely to promise cuts in taxes without the will to cut spending, Labour will be tempted to promise public spending increases without the will to raise taxes."

The authors of the pamphlet, Taking Tax Out of Politics, Sir Douglas Hague, former economic adviser to Margaret Thatcher, and Geoff Mulgan, former adviser to Gordon Brown, warn that without radical reform, "excessive borrowing and fiscal fragility" is likely under both political parties.

A package of measures is needed to put tax policy on a sounder footing. Demos believes both parties should accept a broad target of government expenditure at 40 per cent of GDP. Treasury forecasts put the ratio for 1996 at 42 per cent.

Cutting the middle class welfare state is the key way to achieve such cuts. The authors call for fees for a number of public services, including schools, universities and health.