Now that even Nigel Lawson says tax cuts are not the right way to go, why am I calling for them in my column? Lord Lawson did not issue a fatwa on all tax cuts, but warned against “massive tax cuts.” He is wary of so-called Keynesian fiscal activism – borrowing massively, to cut taxes. As am I. You can argue it’s better than Keynsian spending, but both still do more harm than good. I am arguing that the new era of deficits (I don’t expect we’ll see a balanced British budget for five years) need not lead the Tories to abandon tax cuts. They need a new argument for a new era. One could separate the eras into Before Crash (BC) and After the Downturn (AD). Osborne needs to realise the difference, and recast his policy. And here are my thoughts:-
1) Osborne’s policies and his role on the party was planned in the BC era, both need to be updated now. The economy was not thought to be an issue, his job was reassurance – to carry on as before, but with the prospect of tax cuts at the end of the tunnel. The feeling was that they’d “park” economics as an issue, so Osborne palmed part of his job off to Philip Hammond and took on two other roles: de facto policy chief and election campaign co-ordinator. This needs to change. In AD, the economy is the no1 issue and it needs a full-time Shadow Chancellor. The job can happily absorb all Osborne’s substantial intellectual energy. Time to stop spreading himself so thinly.
2) Osborne should start campaigning for tax cuts, like Barack Obama and Nick Clegg. Neither of these two are offering a meaningful tax burden reduction when you look at their policies, but their rhetoric and positioning is right and makes a welcome difference from Brown’s “spend, spend, spend.” This is what most British people want it. The Lehman Bros collapse marked the turning point in Obama’s campaign – when the economy became an issue he made it work against the incumbent government. The Tories have woefully failed to do the same. A tax-cut message (rather than a distant aspiration) would answer that vital question “how would a Tory government help me?”
3) Tax cuts would not necessarily mean more discretionary borrowing. I can’t stress this enough. Osborne can still identify £3 billion of government waste, and replace that with a £3 billion tax cut. Technically this would count as a debt-financed tax cut, an “unfunded tax cut” because the Tories would be discarding the chance to simply reduce borrowing. But they would stay within the borrowing “envelope” inherited from Labour (and will be laid out in the PBR). So the deficit will be there anyway: the question is how you ‘allocate’ it. I’d like to see the Tories set aside part of it for tax cuts.
4) Osborne needs to accept borrowing as regrettable but inevitable. I agree with Danny Finkelstein that it is “ridiculous is to suggest that borrowing isn’t an issue the Tories now need worry about.” Debt will dominate the Tory years – of course they should worry about the level of it. But I agree with the Tory MP who said that “to increase borrowing to deal with an economic downturn is a perfectly sensible thing to do.” I disagree with the MP who said “increasing borrowing is not a strategy for dealing with recession.” Both quotes came from Philip Hammond in the same BBC interview on Monday, which shows the muddy thinking that needs to be sorted. It’s not about being “for” debt or “against” debt.
5) Osborne is more than capable of getting his act together. The downturn took him by surprise, as it did almost everyone except John Redwood and Jeff Randall. The speed at which the BC era became the AD era – and the difference between them – caught him unprepared. But this is the Shadow Chancellor who has stood up to Brown better than any, who scared Brown away from the election last year with his inheritance tax cuts. He is loathed in No10 as a political strategic evil genius, and rated perhaps more by No10 than by his own party. He has a formidable team around him, and just needs to focus.
Osborne is giving a major speech tomorrow at the LSE, so we’ll know more about what he’s thinking. My guess: he’ll be against any increased net spending. He won’t mind if it’s sucked forward – you may get work done cheaper with so much spare capacity in the building industry. He won’t say anything about tax cuts, because the Tory party is still in therapy over the issue. He’ll want to unveil it as late as possible, which I regard as a mistake because he needs to get the positioning done now. But I believe my disagreement with Osborne is over timing and not direction. We’ll see.
P.S. Lawson says more about this in his biography, pp1026-8.
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