Osborne and tax cuts
Fraser Nelson 4:29pm
“Top Conservative despairs of Cameron growth plan,” says
The Times’ front page today. While The Daily Telegraph’s reads: “No tax cuts before the next election, says Osborne”.
The two stories are related. British economic growth is evaporating, and more than a few Tory MPs are worried that the Chancellor doesn’t have a coherent growth strategy and that he
doesn’t seem to care. Osborne’s cheery
interview with Robert Winnett and Ben Brogan will do nothing to allay such fears. He repeats his position on tax cuts: that, while desirable, they are likedessert once the nation has
eaten its main course of cuts and tax rises. He appears to rule out using tax cuts as a tool to stimulate growth.
I suspect that tax and growth will be a theme of this coming Tory conference, so Osborne’s position is worth exploring in a little more detail. He tells the Telegraph: “I’m a fiscal conservative with a small ‘c’ who believes in lower taxes, but who believes in paying for lower taxes. My first priority is to deal with the deficit…. I’m not somebody who believes you can fund lower taxes by borrowing more money because that is a deceit and the public are smart enough to see straight through it.”
So: no tax cuts, for as long as there is a deficit. It is a rejection of the JFK theory of deficit-financed tax cuts (here). Osborne doesn’t seem to have a problem with extra debt to finance extra billions spent on overseas aid. Debt-financed spending boosts are okay, debt-financed tax cuts are not. Fair enough: he’s made himself clear. But he does not even discuss the option of tax cuts, funded by greater savings in the gargantuan government budget. Why not?
The answer can be traced back to the 2005 leadership debate. The frontrunner, David Davis was positioning himself as a low-tax Tory, proposing that growth in the economy should be used to reduce the tax burden. He was backed by most small-state Conservatives. The Cameroons, then a minority faction, needed their own economic message. It was Letwin, not Osborne, who constructed it. They would talk as if Davis would finance his lower taxes with extra borrowing. During the leadership battle and the months that followed, a new phrase was adopted: “unfunded tax cuts”. This was what the Bad People wanted. Later, Letwin expanded the vocabulary further: tax cuts would threaten “stability” because they meant greater deficits, ergo a weaker pound, etc. So their mantra, from January 2006, was “stability before tax cuts”. It was a baffling stance, implying that all tax cuts are inherently destabilizing. To add a little spice, anyone who spoke about cuts could be disparaged as a swivel-eyed ideologue, a “punk tax cutter” – the type who cost the Tories the last election etc.
Even to suggest that Brown’s spending might bankrupt us was seen as being, well, a bit weird. As David Cameron put it, “I don't suppose anyone gets up in the morning thinking 'I wish the state were smaller.” So the mission was to disarm the small state conservatives economically, accept Brownite levels of tax-and-spend and follow Labour’s plans: not the best idea in retrospect.
I’ve never been a Conservative member and have always found its tribal warfare rather bizarre. But the history of Tories and tax helps to explain the debate now. It indicates why Osborne automatically associates tax cuts with extra borrowing: it’s a reflex learned during the 2005 Tory Wars and their aftermath.
It would be a shame if the politics of the 2005 leadership clouded thinking now. This recession is unlike any other, and its trajectory is teaching us plenty about what works and what doesn’t. Obama tried a $1 trillion stimulus which failed. Sweden, by contrast, tried cutting income taxes to encourage more people to work and create wealth: it is now celebrating the elimination of its deficit. Other factors were at play in both countries. The Obama administration is learning and adapting. Last month, Obama proposed a $245bn income tax cut which even Professor Casey Mulligan, who is normally critical of Obama, calculates will create 2 million jobs.
We cannot afford to dismiss the lessons of other countries for ideological or political reasons – or, even worse, because they are still seen in the context of an internal party battle that ended six years ago.
I have faith in Osborne, however, and I’m sure he will deliver a supply-side package. He is smart enough to know that he is not doing enough and that he must be versatile. From the corner of his eye, he’ll note that Ireland – which frontloaded its fiscal pain – is growing twice as fast as Britain this year, with borrowing costs back down to pre-crisis levels. Osborne will know that low UK bond yields is not the equivalent of a standing ovation from the markets – although it can (and will) be spun this way. His seven-year deficit reduction plan is credible, and he deserves credit for that. But low yields are explained by many factors: chief amongst them the freak phenomena of the bond bubble, explained by Allister Heath in a recent cover story. Expectation of a titanic £400 billion of QE also pushes yields down. And if low borrowing costs were a precursor to economic success, Japan would have been booming long ago. Low yields can be the prelude to a lost decade.
Labour’s slow-mo intellectual collapse has left Osborne with a great deal of political breathing space, but the economy will leave him with none. He’s not in the position to discard tools that will help the recovery.
Previous
TomTom
October 1st, 2011 4:57pm Report this commentThey have created a convoluted mess. Council Tax is the tax that should be cut dramatically, even abolished. It is regressive and noone can reduce consumption to reduce charges. It is collected under duress with liability orders being used with extraordinary frequency, and it is not related to ability to pay.
Whitehall mandates spending and Ratepayers have no say, but are simply forced to pay.
Danny Blanchflower
October 1st, 2011 5:03pm Report this commentFraser
I think this was a very insightful and interesting piece - I don't usually agree with you.
Supply side changes may well produce good sound bites but probably at the Tory Party Conference but they are not going to produce much. Certainly not for a few years anyway.
The MPC looks likely to do more QE perhaps even at its October meeting but it is simply negating the lack of a growth plan from the coalition. Monetary policy works best when it is working with fiscal policy and not against it.
I am also a tax cutter and think the right way to go is to slash National Insurance for a couple of years. Linking it to job creation is a good idea. Reducing VAT back down to 17.5% is something business are calling for and would immediately pull down inflation.
The downside risks I have been warning about are coming to fruition and are set to worsen fast over the next couple of months. Just watch the Q# 2011 output numbers and the bad unemployment numbers that will mean Osborne has nowhere to hide.
Of course it also makes sense to shift public spending from consumption/entitlements into investment with a focus on job creation.
Good post
Danny Blanchflower
ROJ
October 1st, 2011 5:32pm Report this commentWhen is employers' National Insurance a tax on jobs? When Gordon Brown proposes to increase it. When is employers' NI not a tax on jobs? Er, well, now apparently, as we have a Conservative Chancellor.
TrevorsDen
October 1st, 2011 5:37pm Report this commentIs a foreign policy in the best interests of the country?
Well we need one than and if its successful it might save the lives of our soldiers. So we should pay for it.
The NHS is supposedly ring fenced, (but within that it needs to find a startling 20 billion of savings) so since we might well need health care we should be grateful.
If growth is so important then why is the organisation Mr Nelson works for campaigning against a key part of the growth strategy - ie reform of planning?
The 'top conservatives' report seems fairly uncontroversial to me.
Purpleline
October 1st, 2011 6:08pm Report this commentThe biggest boost Osborne could perform is to pay companies to employ young people. SO instead of benefits going to the claimant they go to the local employer.
These jobs have to be valid and come with at least two days college either technical or academic. A bonus could be paid to young people when they pass the course and actually perform well.
The above measure could go hand in hand with abolishing the minimum wage.
His next step should be working to create the free trade zone within the commonwealth. Japan and Korea could be invited to join, as I know Japan has previously been positive to joining and the Americans could also be associate members.
We are Anglo Saxons we are completely different to Europe, different standards, different legal system.
Moving away from the EU we had better use some QE to re-build our Navy as we need to protect our Waters.
Hugo Chav
October 1st, 2011 6:16pm Report this commentFraser,
It's too late to stop the Mega Crash hitting Britain. We had a chance in 2007 to restructure the economy with radical supply side reforms. Brown didn't do it and went with a Keynesian quick fix, he didn't realise that we had hit the peak of a 30 year debt 'super cycle'. Cameron and Osborne still don't comprehend this vital economic insight and thus muddle on with their half baked Brownian masterplan: tax, spend and tinker at the edges.
Printing money to paper over the huge structural cracks in the economy is the easy way out but only postpones the Mega Crash.
Anthony Hilton covered a Jon Moulton speech last week:
"This leads directly to his fear for the future which is that at some point the world's investors will notice that UK government debt was falling neither as far nor as fast as George Osborne said it would but was instead was heading towards 100% of GDP in the official version of the figures and probably twice that amount once the off balance sheet costs of public-sector pensions and PFI were included. There could be a rude awakening when the overseas investors realise the UK is not the safe haven they had perceived it to be.
That abrupt change of mood would almost certainly lead to a flight of capital. Stemming that flight would force the Bank of England to impose sharply higher interest rates. Those higher rates would cause huge distress for private borrowers struggling with massive mortgages and small companies dependent on bank finance to stay afloat and tip thousands of them over the edge. The final act would be a sharp upsurge in bankruptcies and an end to even the limited economic growth we were experiencing."
There is going to be a massive drop in the standard of living of British citizens. Cameron and Osborne are probably going to be the ones that will go down with the ship, the smartest minds I can find reckon it will happen within the next four years.
If Cameron were a true leader he would understand this and prepare the public for the great ordeal ahead.
We need a leader with the foresight of a Churchill.
Purpleline
October 1st, 2011 6:21pm Report this commentSorry one last point. For Osborne to get some Tax in a very easy move would be to put a windfall Tax on Utility companies and PFI firms. With that pay for youth programs.
And turn public sector salaries on their head especially local gov't a CEO of a council should have pay capped at £75k with managers capped at 50k. With the savings as a political move give it back in pay rises to the lower end in the public sector.
We need to rebalance public services and privatise them.
Gawain
October 1st, 2011 6:23pm Report this commentI just don't buy the Osborne is "smart" narrative. There is absolutely no evidence for this whatsoever. All he has achieved so far is to increase inflation, increase taxes, increase unemployment whilst increasing expenditure. The only visible cuts have been defence expenditure at a time when the Prime Minister struts around promoting more interventions and growth which he needs to reduce the deficit. Osborne is a callow, somewhat incoherent political smart Alec.
I am a Conservative Party member and the cut I would most like to see at the moment is Osborne himself. There are better people around the cabinet table and on the back benches.
Tiberius
October 1st, 2011 6:27pm Report this commentFraser, your penultimate paragraph shoots my fox, but your claim about opposing Davis' stance on tax misses the point.
New Labour had conned the lay electorate on the "evil" of tax cutting. No new Tory leader could have been successful at the next general election (which if you cast your mind back could have been called by Brown at any time between autumn 2007 and May 2010) opposing the gold-at-the-end of the rainbow perpetually promised by Brown.
Even talk of spending cuts after summer 2008 was muted because not enough voters actually suffered as a result of the crash. Brown's client state was intact. And this, in conjunction with other oft-repeated reasons such as constituency bias, Scottish devolution, and UKIP boneheads, was why a Tory majority was not forthcoming despite the big swing achieved.
It's a good job that Osborne, as C-in-C, knows his electorate. I posted a while ago that Tim Montgomery might get the Tory manifesto he wants by 2015, but only if the Tories can remove the mistaken assumptions about tax held by much of the electorate. But that won't be easy with the BBC and other instinctively anti-Tory media also still intact.
Justathought
October 1st, 2011 6:52pm Report this commentWhatever option is chosen I suspect that the Chancellor is now realising that it is proving much more difficult to get public spending under control and therefore any tax cuts will have to be postponed.
It now looks like the US is sliding into recession and the only question is for how long and how deep will it be(or depression if you are unemployed since the last recession). The exogenous risk from a catastrophic economic event in europe is on the cards. If the US and Europe fall into recession then GDP in the UK will fall and so will tax revenue. In these circumstances the chancellor is wise to avoid tax cuts just now while he is at the same time clearly stating his preference to do so in the future.
I'm glad we don't have Sweden's taxation rates here (If you combined their income tax and municipal tax its about 60% and thats before you add the 25% VAT)
AJK
October 1st, 2011 7:56pm Report this commentthe solution is in your magazine Fraser- see Peter Jay's article in imaginative ways of stimulating the economy.
TGF UKIP
October 1st, 2011 8:07pm Report this comment"I have faith in Osborne" then quite unlike your Lowlands namesake, Fraser, who used to have a page in the NoW. He appeared to harbour no such illusions on Osborne's economic knowledge or judgement.
I always thought you simply hailed him as a master political tactician and strategist, you know the one who masterminded the Tories' landslide, overwhelming electoral victory last year.
James de la Mare
October 1st, 2011 8:20pm Report this commentI agree with other commenters. This article is interesting. TomTom's comments on the evils of council tax are spot-on. There is almost nothing about that tax which one can justify in its present form.
However the downside to all this is that, as usual, politicians and the public seem paralysed over getting to the real reasons for the problems and what to do about them. We are all thinking the same old stuff from generations ago, an increase in this, a bit less of that, a bit more growth here or there, some more QE, and so on. A hopeless outlook.
Essentially there are three inconsistent - even conflicting - ingredients; what the public (or the politicians who have gained power) think needs to be provided by the state, the ability to pay for it and the willingness to pay for it.
Most people are happy to pay for something they want, even in a time of recession. When I am in the supermarket, doing the shopping for a few old age pensioners, I see little or no sign of recession. Customers are spending money as if there's no tomorrow. Wine, junk food, luxuries and everything. Some at least are not being hit. The public cannot see why drastic cuts everywhere are being talked up when the amount of tax revenue is seemingly reasonably steady, but just not going up as it once was. Right or wrong, the government has not got this across properly or convincingly.
So the government must change its attitude towards the provision of public services. Essential public services - defence, diplomacy, police, fire and ambulance etc. - to be paid for out of taxation. That means not the government choosing how much will be spent on individual services but giving the public tax choice. Let the individual taxpayers decide what portions of their individual tax is to be spent on - which government department will receive what proportion of an individual annual tax bill.
Non-essential public services, schools, libraries, roads, to be paid for by subscription - like road taxes are supposed to be. If those are wanted then the public will pay for what they want. The services remain public. If they aren't wanted, then they won't get so much income. A fair way to provide services. But they are not on offer simply to provide public service workers with jobs. They are on offer because the public wants them and will pay for them directly.
The real burden of cost of providing state services is in the payments made to those who are employed. It generally seems politicians close their eyes to that very basic fact. In a private company, small business or shop you tend to pay yourself out of the proceeds - and not more - to remain solvent.
That principle does not apply to government. Its only means of managing the wage bill is to reduce manpower. That however is awkward, as we all know, because it brings unemployment. We are all in this together, therefore the rewards (salaries, expenses, pensions, etc.) of all state employment must become more flexible. We'll never be off the treadmill without being able to reduce, as well as increase, rewards as appropriate.
This is a time for fundamental change, not for effete tinkering here and there.
Seasurfer1
October 1st, 2011 10:49pm Report this commentOne Major tax cut by 100% of Employer National Insurance charges for Employers with a Turnover of £50,000,000 or less ( with a tapered tail off ) would get the labour market moving - and Growth would follow.
Cynic
October 1st, 2011 11:32pm Report this comment"As David Cameron put it, “I don't suppose anyone gets up in the morning thinking 'I wish the state were smaller.”" Shows how out of touch he is, then. I always get up in the morning wishing the State would get out of my life. I expect Cameron also thinks we're rabidly in favour of the EU and being taxed to death as well.
MarryMeFraser
October 1st, 2011 11:49pm Report this commentLet's hope Fraser Nelson's faith in Osborne is not misplaced. The Chancellor is reported to have an "obsession with day-to-day tactics rather than an overarching strategy"(Guardian), an observation echoed by some of his acquaintances. Will he be clever enough this time to put away his politicking toys? And if he doesn't, who will tell him to?
James de la Mare
October 2nd, 2011 12:10am Report this commentSeaSurfer1 - Very ingenious. But would the employees be expected to make up the shortfall or receive smaller pensions and less healthcare? Would the growth come equally in large and small business if all employer contributions were cut by 100%? Would there be a corresponding cut in employment in pension and healthcare bodies if their money was less?
Tom Pride
October 2nd, 2011 12:29am Report this commentTiberius
October 1st, 2011 6:27pm
“But that won't be easy with the BBC and other instinctively anti-Tory media also still intact.”
So true. The stance of the BBC and other broadcasting media (advocating that state spending is morally good and economically beneficial, therefore the more the better and restricting it or cutting back is morally evil) meant it was impossible to criticise the reckless Brown/Balls spending splurge and stand a chance of winning the election.
Immigration, the euro, the PC agenda, economic policy and advocacy of statism, Islamic extremism – the BBC has inflicted great damage through its mix of unashamedly deliberate and inadvertent bias compounded by sheer ignorance. If Osborne is not prepared to countenance tax cuts as a means to growth at least cut out this cancer.
Right On
October 2nd, 2011 9:56am Report this commentA supply side revolution should have started a year ago - as some have rightly pointed out it takes time to have an impact.
Instead Osbourne has continued down the road of propping up a broken system, it's like treating a snake bite with plaster - at some point someone needs to accept that no fix is possible without a significant rebalancing of the system.
It's becoming increasingly clear that Osbourne and Cameron are far more concerned with avoiding being painted as "typical tax cutting Tories" than they are in actually improving anything.
The deficit needs to be eliminated - and their aims are directionally correct, it would work only however, with a genuine lox-tax, pro growth economy - anyone seen any sign of that?
Dave B
October 2nd, 2011 10:28am Report this commentTax cuts funded by borrowing are not tax cuts, they are deferrals.
I'd like to see more focus on reducing government spending. Where is the re-evaluation of the role of government that was discussed before the election?
Right On
October 2nd, 2011 10:35am Report this comment@ Dave B
Fully agree, but the reduction in government needs to be accompanied by driving the private sector and that means free wealth creators to drive the economy, that starts with reducing the tax burden and driving out regulation.
Dave B
October 2nd, 2011 12:03pm Report this comment@Right on
I'm all in favour of reducing regulation. But any tax cuts have to be revenue neutral.
There is a lot of talk about raising the personal allowance, it should be possible to combine that with eliminating/reducing tax credits and their associated bureaucracy.
Pot Head
October 2nd, 2011 2:01pm Report this commentThe CBO said that the Stimulus saved 3 million jobs & added 2 % to GDP
http://www.newyorker.com/talk/financial/2010/09/20/100920ta_talk_surowiecki
Dave B
October 2nd, 2011 4:10pm Report this comment@Pot Head
Those numbers are plucked from the air. The CBO has no hard data for saying that.
The Obama administration stated, before the stimulus, that it would prevent US unemployment exceeding 8%. That number is measurable, and by that measure the stimulus failed.
http://blog.heritage.org/2011/07/08/in-pictures-june-unemployment-and-obamas-failed-stimulus/
paulg
October 2nd, 2011 7:01pm Report this commentwe can only stand still for so long, then we must move. If we do not we will be caught in the storm.
We must have a serious plan to cut tax, but like surgery we must place the knife where we can cut the cancer out.
Pot Head
October 2nd, 2011 7:50pm Report this commentDave B.The Stimulus did everything that was predicted of it, trouble was that Obama believed the Bush stats on the economy..Based on those Bush figs the stimulus would have kept unemployment under *%
It turns out that Bush had wrecked the US to economy to a greater extend than was initially thought
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