The Tories should take a tax lesson from Ireland

Allister Heath

David Cameron must prove to voters that Conservative economic policy will be more than just Brownomics with a posh accent, says Allister Heath. The Irish have shown him the way

Although the public and business have clearly regained their appetite for tax cuts, to date only Cameron’s tone has changed; his policy to retain Brown’s public spending plans until 2011 remains unchanged. Cameron’s pledge to ‘bring spending down as a share of national income so that over time, the economy grows faster than the state and we can reduce taxes and borrowing’, repeated recently at a Google conference, will barely begin to reverse the massive increase in the size of the state engineered by Brown.

That Cameronian ‘good housekeeping’ will not be enough to regain Britain’s competitiveness is immediately apparent from the OECD’s statistics: Brown jacked up public spending from 37.1 per cent of national income in 1999 to 44.8 per cent in 2008. As a result, 17 out of 28 OECD economies will have a lower state-spending-to-GDP ratio than Britain this year; by 2009, the gap between public spending in Britain and the eurozone will have shrunk to a mere 0.9 per cent. European social democracies have firmly established themselves as the laggards of the world economy; at this rate, our future economic performance will be equally undistinguished.

The plans outlined by George Osborne, the shadow chancellor, to cut corporation tax to 25 per cent, remain singularly unambitious and are still based on plans to hike green taxes, a policy which now looks as dated as kipper ties. In 1997, when the Tories were kicked out of office, the OECD average corporation tax rate was 36 per cent; Britain, at 31 per cent, was still doing relatively well, even if it couldn’t compete with truly low-tax economies such as Hong Kong. By last year, however, the OECD average had fallen to 27.7 per cent; Shire and UBM are relocating to Ireland, where corporation tax is 12.5 per cent; hedge fund managers are flocking to ultra-low-tax Swiss cantons or even Dubai, which levies no corporation or income tax at all.

So what is required from the Tories? First, they must ditch their commitment to match Brown’s spending plans. Secondly, they must outline a long-term commitment to lower taxes, focusing on those that do the most damage to incentives to work, invest and save. Finally, they need to relearn the virtues of supply-side economics and make it once again their mission to explain how lower taxes and spending leads to faster economic growth. They should take an especially close look at Ireland’s astonishing success story and to begin working towards recreating the Irish model in Britain.