Parliamentary Connections

With government spending now so far beyond any previous targets as borrowing heads towards 11% of national income (the highest among the G7 countries) and the public finances deteriorating daily as tax receipts plummet, the tax timebomb is ticking. Fear of its potential damage to the economy has already tipped the Conservatives into state of public confusion. On Saturday, shadow chancellor George Osborne said that a 45% Income Tax band was inevitable, even though that would be little more than a flea bite on the bloated public sector deficit. Yesterday, Kenneth Clarke, recently restored to the Conservative front bench as shadow business secretary, suggested that the previous Tory commitment to raise the Inheritance Tax threshold to £1m could be jettisoned. This was clearly too much tax in one weekend for the  Tories and Mr Clarke was busy "clarifying" his remarks this morning saying that the £1m threshold would be in the next manifesto.

The simple truth is that taxes will have to go up almost as soon as any recovery looks secure. The real questions are by how much, how fast and how can it be done in such a way that the government doesn't promptly push the UK economy back into reverse. The minor turbulence that has disturbed the Conservative revival this weekend will be nothing as the tax bomb ticks ever louder over the coming months.

Lord Turner is no mug. He is not given to make off the cuff remarks (certainly not in interviews with influential political magazines such as Prospect) and he is not naive when it comes to the ways of his political masters. So, those who have reacted, like Boris Johnson, with the "he must be bonkers" line are a long way wide of the mark. This is a carefully considered attempt to shift the focus of the debate about the future of regulation and to test whether there really is any political will to tackle the way the banking sector operates and remunerates itself.

The FSA has come under fire from all sides for not doing enough in the run-up to the financial crises of the last two years and, more recently, Lord Turner attracted criticism for being too weak in his proposals for toughening up regulation of the banking sector. There is only so much that any regulator can do, however, without the wholehearted backing of government and that is the real message behind his Tobin Tax proposal. He has put the ball right back in the centre of the politician's court and they don't like the look of it one bit. The government has been struck into dumb silence (a widespread summer curse in Downing Street it seems) at the shock of this ball being lobbed over their fence. The Tories took one look at it yesterday and booted it as far away as they could, not even stopping to think where it might land and the consequences for their policies. The Liberal Democrats looked at it abit more cautiously and kicked it around but generally didn't like the look of it. To sum up the political reaction in the UK it seems to be: "What? You expect us to do something about the banks? Not likely".

Beyond these political circles, Lord Turner's comments seem to be playing out well. His observation that parts of the financial sector have "grown beyond a socially reasonable size" chime well with the public perception of the sector and, although the details of how the proposed taxes would operate might not interest them, the principle certainly looks right.

In Europe they promise to be very influential over the next few weeks. With the French and Germans already keen on finding ways of bringing the banking sector to heel, especially the Anglo-American institutions they blame for causing the credit crunch, Lord Turner's remarks will be like music to their ears and will be thrown back at Gordon Brown and Alistair Darling at the series of summits taking place next month.