A smiling Chancellor of the Exchequer Alistair Darling [in his first pre-budget statement in office] has apparently 'hammered' small companies, employees and private equity shareholders yet he may also have restored New Labour's prospects with the simple expedient of stealing Tory policies lock, stock and barrel. He has cut the ground from under Cameron and Osborne. He has 'shot the Tory fox'. The quid pro quo for 'hammering' business was that Middle England got its concession on inheritance tax with a doubling of thresholds, backdated for widows and widowers. 

Despite 'business anger' [Financial Times], few consider 18% Capital Gains Tax to be an unreasonable contribution to the public good. Few non-domiciled residents with serious wealth are going to baulk at a £30,000 payment in the seventh year of enjoying the high life in London. The economics of the Statement and the special interest bleating surrounding it are well covered in the mainstream media. As always, we are far more interested in what the statement says about society and politics - and the long term electoral prospects of New Labour.

You must sweep away any temptation to be misled by the political invective. The Tories may moan that New Labour has cheated by stealing their policies but the public will not be interested in this when an election is finally called. The approach to honour amongst thieves is for the thieves to care about.  The general public is interested in material effects on themselves, with perhaps only a dash of idealism about the good society allowed in here and there to make things interesting. It is now admitted that growth will falter but, as we suggested in our last posting, this is not only not unexpected, the public would almost certainly privilege a slight slowing down of the ship while it passed between rocks over any mad dash through dangerous times just to get to harbour on time.

The credit squeeze has also forced the Government into higher levels of borrowing but the main aim of the statement (widely believed to have been originally intended as a platform for at least the option of a General Election) seemed to be to re-attach employed and older Middle England to New Labour and sustain its centre-left support by forcing tax increases on a private business sector which largely votes Tory anyway. The increased health spending was not quite so impressive as it appeared at first sight but was part of the same package of keeping the traditional centre-left and Middle English New Labour coalition in place.

Business may be hopping mad but the bulk of the population is capitalist in property and publicly quoted shareholdings through pension arrangements and not in private sector business ownership (with one exception that we will deal with below). It thinks that business is, at last, contributing to the public good through more than speculative ‘trickle down’. 

10% CGT and taper relief may have been entrepreneurial in intention but it was increasingly being exploited by some very second rate money-shufflers in Mayfair who were now part of the ‘credit problem’. Even the first rate money-shufflers were beginning to realise that tax breaks for private equity had gone too far. The Financial Times noted that the 'private equity titans' has heaved a 'sigh of relief'. It could have been so much worse for them. Simon Walker of the BPEVCA [British Private Equity and Venture Capital Association] appeared more muted in criticism than the CBI and top accountants, allowing himself a 'grumble' amidst the predictable claims of effects on international competitiveness. It is all a little painful but the increase in CGT (offset by a small reduction in corporation tax) is the price that the private equity sector has to pay to get the centre-left off its back and, bluntly, to ensure (as Marxists might put it) that 'capitalism' remains 'hegemonic'.

The real victim of New Labour strategy was scarcely mentioned in the media coverage this morning. It may have been because of its 'pre-election' flavour that the initiative was presented as a foot-note rather than as a headline statement but the Treasury has confirmed that it will promote legislation to stop 'income shifting' within husband-and-wife businesses. This may have sealed the fate of the ‘mom-and-pop’ small service business as a major sector and source (in the long term) of political influence. Small micro-businesses are already struggling against economic modernisation and are, almost certainly, acting as a barrier to technological innovation simply by continuing to exist as a block to economic rationalisation. The Government may well believe that many of them are doomed any way and that modernisation strategies require that the process is hastened rather than allowed to persist through hidden tax subsidy.

The Government was surprisingly ruthless in pressing the legal case against Arctic Systems (which it lost in the House of Lords this summer), almost appearing vengeful against two ordinary folk trying to keep themselves firmly within the British middle class.  But it was not vengeance, it was strategy - it appears like vengeance because this generally Tory-voting class (let us move on from the particular case to the issues of principle), ranging from small newsagents through to one man management consultants who happen to employ their wives as 'secretaries', is to the current stage of national modernisation what the Labour-voting miners were to the initial stage.

It is hard to over-emphasise the massive changes that are about to take place as a result of technological innovation. Not all of it is very predictable but what is predictable is that huge investments are required - from massive logistical points for goods distribution through to the infrastructure for electrical supply to new 'clean' automotives. The logistical centres are already being built outside the urban areas to hold stocks of items to be distributed, not by customers going to centres where they park their car and pick up goods and pay on receipt but where they order and pay online and have the material delivered. Many items of daily use, such as news, are increasingly going to be downloaded so that, at some point, small retailers are going to be placed under increasing pressure to diversify.

Signs of other social, cultural and political changes to come lie in current business news. The BBC is about to cut 12% of its work force, mostly in factual programming. The BBC has also been under a great deal of pressure for some time on ethical matters, its ‘liberal’ bias and its competition to private sector enterprises. On the other hand, Google’s value in the market now stands at $190bn or so after a recent share rally and it has started experimenting with letting targets of news stories correct coverage directly on its site. There is growing interest in the very fast-moving shift of power from traditional to new media. The message here is that entrepreneurial change also involves changes in power structures and favours a youthful ability to master innovation over stability and 'experience'. These new ways have little time for cultural traditionalism or authority. Old-style paternalist liberals are as at sea in these new conditions as traditional conservatives.

Similarly, as we have argued elsewhere in regard to law firms, professional and marketing services that we had all believed could not be commoditised and branded for reliability and quality are going to be (through the efficiencies provided by new technologies as much as by any other means) transformed into larger scale integrated businesses - even if new forms of management are going to be required that emphasise home working and creative freedom.

We are seeing the beginning of a shift in which too many individual professionals and small shop owners are chasing a decreasing pot of business. Face to face business, relationally-driven and centred on locality, will never entirely disappear but it is not modern, has problems adjusting to innovation, offers second best service and faces competition not only on quality but on price and, most important of all, availability.

In this context, Government is not engaged in vengeance for the miners (as Tory propagandists might like us to believe) but is looking at how to discourage an inefficient model in the rising generations while seeing off the current and older generation humanely.  And it is in this context that part of the answer lies in removing 'abuses' of the tax system that allow such petit-bourgeois to survive for longer than they should and yet (with the rise in inheritance thresholds) removes some of their fear for the future. Basically, Government is saying - start your exit strategy sooner rather than later.

Any final legislation is likely not to be so draconian as feared, at least once the lobbyists have got their foot in the door, but the general tendency will be to remove the idea that the economic efforts of one individual can be treated (for tax and efficiency purposes) as if it covered the economic value of two persons. Tax avoidance has been keeping many small service businesses well within the middle class. Their slow proletarianisation will not bankrupt them but it will limit lifestyle options and it will force them to reconsider their future. Those that do not adjust will simply get indebted. This is, in effect, an attempt at the slow collectivisation of the British petit-bourgeoisie through market forces.

The Treasury’s economic modernisation calls for the ending of hidden state subsidy (as it sees it) of the lower middle class service sector in advance of technological innovation. Thatcher did much the same to the miners. New Labour is permitting something similar to happen to the postal workers, so the commitment is to modernisation and not to class warfare as such. New Labour is forcing the pace on adjustment to technological innovation in a way that is not just a matter of recovering lost tax revenues. 

As for ‘incentives’, as we outlined in our last posting, the Government is looking for stability and sustainability more than rapid growth to weather the storm ahead, which is perceived to be difficult but survivable. Business ‘incentives’ are now seen to have driven UK growth up to a certain level of success but also to have allowed entrepreneurial over-heating. Innovation in technology has become displaced by financial innovation and excessive technological speculation at the margins of innovation that seem to have much less to do with investment, as policymakers understand it, in new productive capacity.

We are now back into real politics after a long period of New Labour hegemony. New Labour has cleverly spiked the Tory guns on inheritance tax but it has equally ‘split the bourgeoisie’.  Those members of the middle classes who are engaged as classic capitalists (who can be quite small in scale) will now cling to the Tories as the party of business individualism. In this class, economic interest and culture will combine to confirm a block of Englishness that will probably be permanently resistant to any further incursions from New Labour into their territory.  The employed middle class or the middle class that is doing well and considers stability and 18% tax rates for stability to be reasonable – and there are many of these – remains in play for New Labour to pick up at an Election.

In this sense, New Labour has pitched itself as the party of continued modernisation and the Tories are being manouevred into the position of representing resistance to change. The net result is that the Conservative Party is going to find it difficult to escape from its traditionalist cultural heritage because that heritage - of economic individualism - now faces a world of complex interdependent networks. The economic interests of its core voters and the expansion of the networked world are no longer quite so consistent.