The Tories should take a tax lesson from Ireland

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

For those who persist in dismissing the case of Ireland as unrepresentative (it’s a small country, it used to be poor and so on) there is oodles of academic evidence that tax cuts which improve incentives to work, save and invest will also boost growth, as I discovered when I wrote my book Flat Tax: Towards a British Model in 2006. Since then, the evidence has, if anything, become even more compelling; Ireland is no fluke.

Perhaps the most striking piece of research was released earlier this year by the European Central Bank. The authors, António Afonso, from the ECB’s Research Unit on Complexity and Economics, and Davide Furceri, from the University of Palermo and the University of Illinois at Chicago, found that each percentage point growth in government consumption as a share of GDP leads to a 0.13 percentage point fall in GDP growth.

Closer to home, the TaxPayers Alliance recently commissioned the Centre for Economics and Business Research, an independent City-based consultancy run by Douglas McWilliams. They modelled the impact of pre-announced, phased corporation tax cuts of 2 per cent each year until the Irish level of 12.5 per cent was reached.

Their findings were striking. By 2021, by which time we would be in a third Tory term of office, GDP would be 8.7 per cent higher than it would otherwise be; investment 60.9 per cent higher; employment 8.7 per cent higher; and wages 13.5 per cent higher.

Although this plan would cost £3.8 billion initially in reduced revenues (in fact barely more than Brown’s partial U-turn on the abolition of the 10p income tax rate) by 2021, revenue would be £28.7 billion higher. Within eight years, revenue would be higher than without corporation tax cuts: in other words, tax cuts would actually pay for themselves.

David Cameron’s broad acceptance of the Brownite consensus looked politically clever during the boom years, when most people still thought the prime minister had been a good custodian of the economy. It will look increasingly misplaced when people begin to realise that Cameron has failed to propose a real break with the policies responsible for the problem in the first place. It is time for the Tories to acknowledge the new mood and offer the British economy the tonic it really needs: lower taxes.