Cutting logic
The hint of tax cuts made by Gordon Brown this week is a piece of political audacity which could only be matched were the Conservatives suddenly to commit themselves to the common ownership of the means of production. This is a Prime Minister who for years has sought to beat down the opposition by claiming that the meanest of tax cuts would result in havoc in schools and hospitals; who suddenly, facing a budget deficit of at least £100 billion this year, has decided that, after all, there is some money in the kitty to reduce the tax burden.
It is scarcely necessary to point out that any tax cuts which do appear in the prebudget report will be a pre-electoral bribe. Even without the Prime Minister’s proposed Keynesian spending splurge, the government could not afford tax cuts. As recession bites, tax revenues are already falling sharply. Any tax cuts now will need to be more than reversed after the next election, as the government attempts to pay off its debts. Gordon Brown does not even attempt to disguise this: in his speech at the Lord Mayor’s banquet he described the government’s increased borrowing as ‘temporary’.
Nevertheless, David Cameron has faced a tough decision this week. Does he emphasise the inconsistency of Brown’s position and the irresponsibility of increasing spending at the same time as cutting taxes, or does he seek to trump Brown by bringing forward tax-cutting proposals of his own, knowing that failure to do so will allow Brown to go into the next election posing — however awkwardly — as a tax-cutting party?
So far, Mr Cameron has produced a measured proposal which, although welcome, does not suggest that he has fully resolved this dilemma. He has suggested that companies enjoy a rebate on national insurance contributions if they take on workers who have been unemployed for three months or more. The Conservatives say this will be self-financing, as the £2,500 which the Inland Revenue will lose for every worker on the average salary will be exceeded by the £8,000 it will save the Exchequer in unemployment benefits.
There are some questions which need to be asked of the scheme: would it, for example, make it harder for workers to get a job if they haven’t been unemployed for three months? Nevertheless, the proposal is to be welcomed — and hopefully should form the basis of the Conservative’s longer-term strategy for cutting taxes.
Though paying tax is hardly popular in itself, the Tories have suffered terribly at the ballot box over the past decade for promising to cut bills. Every time they have uttered the words ‘tax cuts’, Labour’s strategists have managed, in the minds of voters, to add the suffix ‘for the rich’. It has become a presumption that Tory tax cuts would be mainly for the wealthy — while the poor would suffer from the corresponding reduction in public expenditure. This presumption has been as electorally toxic as it is unfair.
It was inevitable that sooner or later taxpayers would see through the conceit that their taxes were all being spent on essential services which would suffer dearly were a few pounds to be shaved off their tax bills. As shocking examples of public sector waste grew there had to be a point at which taxpayers would come to the conclusion that, should they be allowed to keep a little more of their money, they could spend it more wisely than could the state. That moment arrived last September when George Osborne boosted Conservative poll figures by proposing to raise the threshold of inheritance tax: a move which would be funded by a new levy on non-domiciled taxpayers. We support that initiative, but it is imperative that further tax-cutting proposals must concentrate on the poor.
National insurance contributions, as David Cameron now seems to have concluded, are absolutely the right place to begin. There is no national insurance fund, and there never has been: these ‘contributions’ are merely a form of income tax by another name, though one which differs from the official income tax in that it is levied only on earned incomes. It is, quite blatantly, a tax on jobs — inexcusable at the best of times, let alone at a time of sharply rising unemployment. Moreover, it is a tax which falls disproportionately upon the poor: employees pay a rate of 4.85 per cent on annual earnings between £5,225 and £34,840 a year, falling to 1 per cent on earnings above that level.
The Conservatives would be very foolish to overdo promises of tax cuts. Quite rightly, their economic policy under David Cameron has revolved around budgetary discipline. An incoming Conservative government will be faced with a huge amount of public debt which will have to be reduced. Temporary tax rises may even be required to bring debt under control. But why not now commit a future Conservative government to the aim of reducing, and eventually abolishing, the tax on jobs?
Gordon Brown has spoken this week of the need to tackle the world’s economic problems by rejecting ‘tired old orthodoxies’ — by which he appears to mean he wants to ditch his own ‘golden rule’ of balancing the government’s books over the course of the economic cycle so that he can carry on spending throughout the recession. But it is a tired old orthodoxy itself — dating from the 1930s, to be precise — that only governments can be trusted to spend their way out of a recession. The notion that Britons are secretly hoarding cash is laughable: the savings ratio — the amount of disposable income which is being put aside by households — is lower than at any time in the past 50 years. The public would gladly spend its way out of recession, too, if it were allowed to keep more of its money.
The task for Mr Cameron now is to hold his nerve and to set out an aggressive manifesto for economic recovery that combines a strategy for debt reduction with an unambiguous commitment — political, moral and ideological — to tax cuts. Britain under Brown is now embarked on a reckless Keynesian trajectory. The Tory challenge is to make clear that — to adapt the Iron Lady — There Is an Alternative.
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