Want to cut taxes? First cut spending. Here’s how

After a week of clamorous competition between the parties over tax cuts, Fraser Nelson offers a guide to paying for them: a programme of spending cuts that would preserve core services but shave off the fat of the Brown years. All that is needed is political will There is something plainly suspect about Gordon Brown challenging David Cameron to a duel over tax cuts. The Prime Minister has never believed in the inherent worth of tax cuts, and has spent much of the last decade gradually persuading the Conservatives not to believe in them either: it has been an article of Cameroon faith that ‘upfront tax-cut proposals’ were a low priority. Yet now the old battle manual has been torn up, and the PM is fighting an unprincipled guerrilla war of stunning opportunism. As if reading out from a document he has found in the street, he is reciting some of the key arguments for tax cuts — and then waiting. If there is no Tory response, he will have the field to himself. If Mr Cameron bites, Mr Brown is hoping he will do so in a halfhearted way that will rekindle old Tory wars, reviving the battle between fiscal conservatives and Reaganite tax-cutters, and leave his enemy ineffectual and divided. It is, he hopes, the perfect trap.

Yet there is a third option, which Mr Brown is gambling will not present itself. This is that the Conservatives unite, return to first principles and call for serious, funded tax cuts as a logical element of their broader radical campaign to transfer power from the government to the public. If ‘social responsibility’ means anything, it surely means trusting people to keep and spend as much of their earnings as possible. With a government budget of £620 billion, Mr Cameron would only have to shave off a relatively small proportion to make a real impact upon our pockets. And while tax cuts have indeed been a divisive subject for Tories in the recent past, it has never been easier or more potentially popular to be a tax-cutter now, and for a simple reason. Thanks to Mr Brown’s profligacy, there is an extraordinary amount of fat to cut.

Although Mr Cameron has arrived last to the tax-cutting race, he has two inherent advantages over the other players. For all Nick Clegg’s fine words, he has no money to play with. All Liberal Democrat leaders are trapped by the same conundrum: their target seats are held by Tories, yet their membership will not allow any serious shift to the right. Look in detail at Mr Clegg’s eloquent calls for a fairer tax system, and he is actually talking about £5 billion of tax cuts: less than 1 per cent of government spending. A negligible offer, in other words.

Next, Mr Brown. The Prime Minister cannot bring himself to cut back the size of government. So any tax cuts he promises will be financed by extra debt which — as Tony McNulty, his estimable Employment Minister admits — means deferred taxation. George Osborne, the shadow chancellor, is against debt-financed tax cuts — yet this should not constrain him. He need not add a penny to the deficit levels he would inherit from Labour. By identifying enough government waste, he can find all the tax cuts he needs.

Politically and economically, his task is easy. Since Labour came to power in 1997, tax rises have averaged £6,200 per household; so one of the fastest-rising costs facing ordinary families has been the cost of government. Only the Conservatives believe Britain would be a stronger and fairer society had more of this money stayed with those who earned it, and as Britain starts to feel the harsh effects of recession, this is the dividing line in contemporary politics. Ignore the often shrill competitive rhetoric of recent days: fundamentally, Conservatives believe in empowering the public. Fundamentally, Labour and the Lib Dems believe in the state.

Starting with the premise that government in Britain has grown out of all proportion to its usefulness, the Conservatives can start rebalancing the power scales. Cutting the overall budget is a task that no British postwar government has ever managed. Depressingly, it is enough of a battle to stop the increase. By aspiring to do so, the Tories can say they will preserve every penny of every departmental budget. This will last them through the general election, and still create the space needed for sizeable tax cuts.

The NHS budget must be first. It has been fed like a foie gras goose for the last few years: its budget has more than doubled while the quality of the service — to put it politely — has not. There is a case for a period of stability, during which the system might digest the amount pumped in. Its budget could be kept at inherited levels for three years and it would still rank among the best-funded health systems in the world. Even growing health spending in line with inflation would save £7 billion a year, compared to the trajectory set by the government.

On education, too, Mr Brown can claim the dubious achievement of doubling spending in real terms while English schools have plummeted in world performance tables. Not only are we being overtaken by other countries, but international studies show standards are falling here. So it is — staggeringly — that extra money has coincided with a decline in standards. The Conservatives need not continue down this path. As any independent school will tell you, £6,200 per pupil — broadly the per capita spend they would inherit in 2010 — is enough to provide excellent education in a state system with 22 pupils per class.

Money is no longer the key issue in education. By letting independent companies set up and run state schools, the Tories would achieve through competition and local institutional vigour what Mr Brown has failed to do by cheque-writing and Whitehall diktat. Increasing the education budget with inflation would still encourage a new breed of state schools and save £4.1 billion a year.

But as the budgets of core public services are protected, failing government schemes must be axed. Chief among these are the Regional Development Authorities, which have proven an expensive and comprehensive failure. They were set up to improve the competitiveness of various English regions. Yet nine years and £15.3 billion later, one can search in vain for a list of palpable accomplishments. Examples of waste are legion, from the remuneration packages of their chief executives — often paid more than the Prime Minister — to the cost of junkets like the £20,000 which Yorkshire Forward spent sending staff to a film festival in Dubai. That said, Dubai has more than a few lessons on how to encourage prosperity. Extraordinary wealth springs from the desert there and its development secret is simple: charge no tax. By designating low-tax zones in job-starved regions of England, a Conservative government could import some of this inexpensive magic from the Emirates and see what happens.

Much could also be saved by finally igniting the ‘bonfire of the quangos’ that Mr Brown promised in 1995. English Partnerships is one of the larger ones: it largely duplicates the work of the RDAs with an inexplicable £221,000 going to its chief executive. The head of the British Waterways Board is paid £280,000 — some £100,000 more than six years ago. Designed to cut out the inefficiencies of government, quangos have replicated their extravagance.

They are all ripe for consolidation or abolition. Bogus pressure groups could be abolished, such as Postwatch (£15 million) the National Consumer Council (£3.5 million) and Energywatch (£15 million). As the TaxPayers’ Alliance points out, their duties could be taken over by grassroot organisations if the need were strong enough. It is hard to put a precise figure on how much this would save, due to the appalling lack of data. But David Craig, author of Squandered — an indispensible book chronicling the sickening waste of the Brown years — estimates that cutting quango budgets by 10 per cent would save £6 billion a year.

Then take the London Olympics: please take them. The £4 billion bid has mushroomed into a £14 billion budget, as construction firms tested the old maxim that there is no more gullible paymaster than the government. An Austerity Olympics run on twice the original budget would save £7 billion. It might lack China’s dazzling opening sequence, but the world would forgive us. By that time, the Brown bust would have left Britain with more debt than Churchill took on to win the second world war.

The list could be extended — yet, intrigu ingly, Mr Osborne is wary of compiling his own. He has a few tax cuts already in the pipeline matched to specific spending cuts (such as scrapping identity cards) but does not want to publish a detailed hit list. He is still haunted by memories of the 2005 James Review which identified £35 billion of waste — a figure Mr Brown instantly seized on to warn voters of ‘deep and painful cuts’. From opposition, the shadow chancellor argues, a hypothetical cost-cutting exercise is impossibly crude, and (he claims) opens up the Conservatives to the charge that their real intention is to cut essential services. Yet in the next few months, the Tories will be granted access to the civil service as part of the normal pre-election conventions. If they are serious about funded tax cuts, they will embark immediately on a robust cost-cutting exercise more radical than any undertaken since the Grace Commission set up by Ronald Reagan, which found that a third of income tax was consumed by waste.

The Grace Commission yielded another discovery which interests the Tories: the extent of tax lost to the underground economy. While it is hard to measure, academics reckon it accounts for some 12 per cent of Britain’s economic output — even excluding criminal activity. This deprives the Treasury of at least £70 billion. One must also consider the human cost of a vast murky underworld, whose workers have no legal protection. This is the undiscovered country within Britain which Mr Brown cannot bring himself to acknowledge as it grows in direct proportion to his taxes and regulation.

Mr Osborne is considering looking at this by fundamentally changing the way the Conservatives assess tax. Mr Brown’s great achievement has been to use the static tax model, arguing, for instance that a £3 billion cut will result in an identical loss to the Treasury. This is not so — as lower taxes incentivise work and, ergo, generate more revenue. Mr Osborne intends to use a dynamic model in his planned Office for Budget Responsibility, which will take account of a simple principle: lower taxes expand the tax base. The less the government confiscates from the salaries of the low-paid, for example, the more incentive there will be to come off welfare.

And — whisper it — it works for the rich too. Nigel Lawson, for example, can claim to be one of the most redistributive chancellors in history — but for reasons Mr Brown would hate. When he cut the top rate of income tax in his famous 1988 budget, for example — a budget vociferously opposed by Mr Brown — the richest 1 per cent paid 14 per cent of all income tax collected. It has since soared to 23 per cent. The richest now shoulder a far greater share of the burden because Lord Lawson lowered their tax rates. This is a paradox that Labour and the Liberal Democrats, with their zero-sum economics, are incapable of understanding The NHS budget can grow where it’s needed, by cutting the army of non-medical consultants who are not needed. One can easily aspire to take a fifth of the underground economy into the legal sector. The above list — by no means comprehensive — easily yields £40 billion in waste, which even if split halfway between tax cuts and deficit reduction could reduce the basic rate of income tax by 5p in the pound or slash corporation tax to 10 per cent to boost jobs. More likely Mr Cameron would target tax cuts at the lower-paid, lifting them out of tax altogether.

The opportunity here for the Conservatives is far wider: to use the downturn finally to escape the ideological parameters set by Mr Brown and the policies which have led Britain into such economic disaster. In its place Mr Cameron can proclaim a new, optimistic Conservative strategy which would protect core public services while cutting government waste. This approach would combat recession by lowering the burden on families and companies. This is why the Prime Minister may soon come to regret declaring a competitive war over tax cuts. Fought properly, this conflict should have only one natural victor.