What George Osborne didn’t tell you about the Tories’ radical economic agenda

James Forsyth

07 October 2009

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James Forsyth reviews the week in politics

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.