James Forsyth reviews the week in politics
It was as if the banks were taunting the Conservatives when they arrived into Manchester Piccadilly on Sunday: the cash machines at the station had run out of money. The queues were snaking around the escalators, and Tory activists could do little. This, of course, is excellent preparation for government in the age of austerity. What to do when money is in such short supply? It’s a question that the Conservatives are developing a convincing answer to — but very little of their thinking was revealed in Manchester this week.
This was the iceberg conference: only a small part of Tory policy was allowed to peek above the surface. The emphasis was on the icy water of austerity: telling the country to work longer, public sector workers that they will get no pay rise and those earning more than £50,000 that they will no longer receive means-tested tax credits. But the question that dominated debate in the conference bars — how the Tories are going to cut back the £175 billion deficit — remained conspicuously unanswered.
There are good reasons why Mr Osborne and his team did not reveal their whole hand in his speech. Partly it was because the Tories fear that every commitment they make to cut spending or raise taxes hands Labour an issue with which it can try and revive itself. Being straight with the electorate has its limits; there is little political advantage to be had in saying that nearly all capital spending projects are likely to be delayed or that the strong probability is that the only new roads to be built are going to be toll roads. Alongside these measures, the first Budget will almost certainly increase VAT to 20 per cent — again, hardly a vote winner.
There will also likely be some form of additional tax on banks, something The Spectator called for last week. I understand that one change being floated is what would be, in effect, a windfall tax on financial institutions. It would be billed as an accountancy rule: any bank that has received state aid cannot write off old losses against tax. Osborne’s office is rightly concerned that banks will try to put their international losses through their London office, with a view to paying no British tax for years or more.
A simple rule outlawing any such manoeuvre — for the banks kept alive by taxpayers, at least — would allow the Exchequer to collect tax at the normal rate. Many banks will protest. But the Tories are every bit as ready for a fight with them as they are with the public sector unions. As one senior Tory adviser told me, ‘real change only comes when you take on the vested interests’.
The size of the black hole in the public finances — £175 billon — is such that even these measures wouldn’t make too much of a dent in it. The higher rate of VAT would only bring in not much more than £10 billion. If the Tories were to decide to fill the deficit with a 70:30 split between spending cuts and tax rises (the ratio being discussed by most Conservative-inclined economists) then far more work would need to be done. But a plan is under consideration that would see Britain start to grow its way out of the fiscal hole it is currently in.
Intriguingly, I understand that the truly bold measure in Osborne’s first Budget might be a significant tax cut. The Tories are already committed to reducing the main corporation tax rate for big business from 28 per cent to 25 per cent (the move is revenue neutral as various allowances will be scrapped as part of the package). But this might be only the start of plans sizably to reduce corporation tax, a move that would make the British economy far more globally competitive as well as spurring job creation, leading to an increase in a whole host of tax revenues.
The plan is a Laffer-style supply-side reform: by lowering tax rates, you increase the tax yield. There are even whispers that the aim is to reduce it to close to Ireland’s 12.5 per cent level by the end of the party’s first term in office. Hints about this policy have been dropped — but overlooked amid the obsession with Europe and cuts. In a speech to a Spectator conference last month, Osborne mentioned lower corporation tax rates as the first step in his plan to revive British economic competitiveness. Last week David Cameron wrote in the Sun of a ten-point plan including: ‘cut corporation tax to create jobs’ — an endorsement of the principle behind a far more ambitious plan.
It might seem odd that the Tories are keeping quiet about a bold growth strategy; especially as the party’s message could do with an injection of hope and optimism. But just as with the eventual position in Europe, the leadership has yet to take a final decision. It is also a feature of Cameroon thinking that they believe it is far easier for governments than oppositions to set the terms of political debate. They worry that radical plans outlined in opposition are either copied by the government — as the Tory inheritance tax plans were — or are demonised and distorted. Far better, they think, to put the scheme into action in government and let the proof of the pudding be in the tax receipts.
Mr Osborne’s first Budget will likely define his whole period as chancellor, so it is little wonder that so much work is being done now — and so little of it announced. The details of the project are known only to a tight-knit (some would say too tight-knit) circle. The big moves are executed with little consultation. Some shadow Cabinet members were only briefed on Monday by the shadow treasury team that public sector pay would be frozen.
The fiscal challenge facing the next government is so momentous that the solutions will have to be inventive. What Osborne’s speech demonstrated is that measures that would once have been regarded as seismic — like a public sector pay freeze — are now seen as an opening bid. His £7 billion cuts plan isn’t peanuts, but it isn’t £70 billion either. It is possible to raise taxes or to cut spending to get the public finances back on track. But to reduce the deficit via economic growth, triggered by a corporation tax cut, would be a truly radical and truly Conservative solution to a truly Labour problem.
This article first appeared in the print edition of The Spectator magazine, dated October 10, 2009