The future of the Tories is at stake

To govern is to choose. So leadership contests for a party in government tend to come down to a key policy question. In 2019 it was how to break the Brexit deadlock; this time it is what to do about the economy. Should the new prime minister prioritise tackling inflation or delivering immediate tax cuts?

The candidates have been divided on this issue. Rishi Sunak, the former chancellor, who I have been friends with for years, argues inflation makes everybody poorer and so getting control of it must be the primary objective. On the other side is Liz Truss. The Foreign Secretary wants, as she tells Isabel Hardman in this issue, to introduce £30 billion of tax cuts straight away. Penny Mordaunt, the trade minister, hasn’t gone that far – she says that this contest is not the right time to set out what her fiscal approach would be. But she has committed to slashing VAT on fuel from 20 per cent to 10 per cent.

Truss talks about how she wants the biggest shift in economic policy in 30 years. But her new paradigm doesn’t seem to contain many hard choices. She wants big tax cuts but she is also clear she doesn’t want to return to austerity, telling the Times: ‘One of the mistakes that we made in the Cameron years was making cuts to public spending that weren’t necessarily sustainable, for example on social care.’ She also wants to increase defence spending to 3 per cent of GDP by the end of the decade, a commitment which would cost another £20 billion.

It may be that Truss thinks the way to balance all of this is with much tighter monetary policy; she spoke at The Spectator’s hustings about ‘a tougher Bank of England mandate’. But interest rates would have to increase significantly for her immediate tax cuts not to be inflationary, and the independent Bank of England shows no sign of moving from its policy of incremental rate rises. Ultimately, though, Truss is betting that her tax cuts will stimulate such economic growth that they will be worth it, which is a mighty big gamble.

There is also a political risk for the Tories in the insinuation that cake can be had and eaten. In a bidding war over public spending, the Conservatives will never be able to outdo Labour. If tough choices are not necessary, then Labour will tend to be better at offering voters what they want. If the Tories can tell the public that they won’t have to sell their home to pay for social care because the state will step in and that no tax needs to go up to pay for it, why can’t Labour do the same – and then some?

Fiscal responsibility has been the Tories’ strongest argument for years. Without it, they run the risk of being swept away. It was the blow to the Tories’ reputation for economic competence on Black Wednesday that led to their greatest ever defeat in 1997. One of the refreshing things about Kemi Badenoch’s leadership bid was her willingness to point out that there are rarely easy answers in politics. A Conservative party that pretends there are will be outbid by the left.

For these reasons, it is right that the Tories focus on the economic question. They don’t have long to think about it, though. While the result of the decisive members’ vote will not be announced until 5 September, much of the voting is likely to take place as soon as the ballots go out early next month.

Every leadership election tends to be described as the most significant in a party’s recent history. But this contest has claim to be of particular importance. For if the Tories lose the next election, they may well be out of power for a generation.

The new leader will face the enormous challenge of avoiding an anti-Tory majority at the next election, which currently is the most likely outcome according to polls. This ‘progressive’ majority – a combination of Labour, Lib Dems and Greens – would almost certainly introduce a series of structural changes to our politics designed to keep the Conservatives out of power, including electoral reform and votes at 16.

The Tories have been the great beneficiaries of first past the post: at the last election, it enabled them to win a majority of 80 with under 44 per cent of the vote. If the Liberal Democrats’ choice of the single transferable vote (STV) became the new electoral system, it would be awful for the Tories. Calculations suggest that they would only have won a majority twice in the post-war era under STV: even Margaret Thatcher would never have been able to govern on her own.

Keir Starmer declared this week that he was ‘ruling out’ any arrangement with the Liberal Democrats. At this stage in proceedings, this line makes sense for him. But if there was a hung parliament after the next election, he would have to find a way to secure the Lib Dems’ support, and fast.

If the Tories are going to recover before the next election, they will not only have to get inflation under control and get the economy going but get the state to work better. Public service reform has been almost totally neglected for the past few years. Michael Gove, a cabinet minister until a few weeks ago when Boris Johnson fired him in a bid to save his premiership, observed this week: ‘There are some core functions – giving you your passport, giving you your driving licence – which are simply, at the moment, not functioning.’ If the Conservatives can’t fix these state failures, they won’t win the next election – and they won’t deserve to either.

The question of the NHS backlog is even more pressing. Even before the disruption caused by the latest Covid spike and the heatwave, the waiting list was predicted to be close to ten million by 2024. It is very hard to see how the Tories can win the election unless they succeed in getting that number down.

In opposition, the Tories would have the luxury of a long debate about where the party should go next. In office, they have to accept a shortened process, one designed to get a new prime minister in place as soon as possible. This doesn’t mean, though, that the party must skip all intellectual debate. The Tories need to decide if they are still fiscal conservatives or not.