Next stop, tax stop

The Conservatives have been rightly looking to Sweden for ideas on education policy, now they should be looking a little further south, to Denmark, for inspiration on tax policy. In Denmark, a centre-right government has been in power for eight years and, despite technically being in a recession, the country’s thoroughly modern market economy and pro-active labor market policies – which combines easy hiring and firing with high benefits for the unemployed – is helping to weather the storm.

But a key ingredient for Prime Minister Anders Fogh Rasmussen’s success in a country seen as more social democratic than centre-right has been the “tax stop” (or “skattestoppet” in Danish), which froze all taxes and duties at their January 2001 level. Tax rates can be cut, but none can be raised.

First promised in the 2001 election, which saw the routing of Denmark’s long-standing Social Democratic government, the tax stop was the centre-right coalition’s answer to ever rising taxation. Fiscally, the goal was to arrest the growth of public spending (and halt the raising of taxes), especially at the local level. In reality, maintaining the tax stop implied a need to cut public spending while ensuring that the marginal tax rate did not acts as a barrier against people moving into work.  Politically, it represented a compromise between the Conservatives – who wanted tax cuts and a flat tax rate at no higher than 50% – and the coalition-leading Liberals, who worried about the state of public finances.

Today, the policy is wildly popular with Danish voters and four years after its introduction even the Social Democrats accepted the principle – and politics – of the tax stop. As George Osborne pushes back against Gordon Brown’s end-of-summer economics focused re-launch, Denmark’s “tax stop” may be just the kind of policy that the would-be Conservative Chancellor should consider copying. It would bridge the gap between the tax-cutting instincts of the Conservative base and the concerns of deficit hawks who worry about creating a financial black hole.