Where the cuts will come
Patrick Cosgrave
It is now clear beyond question that the main thrust of the Conservative election Campaign is the twin undertaking to bring down inflation, principally by controlling the money supply, and sharply to reduce personal taxation, both to increase the economic freedom of the individual and to liberate and encourage the wealthgenerating sectors of the economy. Conversely, the principal Labour argument is that Mrs Thatcher's attempt to achieve these ends will provoke both economic and social disruption, not least because Labour believes that the substantial reduction of Public expenditure which the Tory policy would necessarily involve will be a burden Principally on the social services and on employment. The Chancellor has denounced Mrs Thatcher's manifesto as more revolutionary than that of the Communist Party, and thus underlined a curious feature of the campaign. The main questions are, therefore, can Mrs Thatcher do it? And, second, can she do it without revolutionary — or, more strictly, counter-revolutionary — disruption? These questions are all the more critical in that, while it is now common ground that control of the money supply and the consequent limitations on public expenditure are vital in the battle against inflation, a government determined substantially to reduce taxation will have to make much deeper public expenditure cuts than one simply determined to defeat inflation through moving towards a balanced budget. In other words, on the monetarist argument, inflation can be eliminated even in a high taxation economy (the most distinguished exponent of this line of argument is Mr Enoch Powell), but an inflationfree low taxation economy can be achieved Only by a very substantial reduction in Public expenditure.
So, can it be done? The first point to make is the highly relevant one of the eomparaftve records of the two parties in government. Every post-war Tory government has substantially reduced taxation While every postwar Labour government has substantially increased it. Of course, the effect both of tax cuts and the reform of the taxation systems during the life of the 1970 government was largely counter-acted by the unprecedentedly high inflation which that government permitted. Moreover, the Principal practical beneficiaries of the tax Policy of Mr Heath and Lord Barber were those at the lower and at the higher end of the income scale: the worker on average and just above average earnings benefited very little, and the electoral consequences were seen in the defeat of February 1974. However, having regard to the current Labour proposition that Conservative policies bear most heavily on the poor and the sick it is relevant to point out that the real net weekly income of the average poor family (with two children) rose by fifty per cent from 1970 to 1974, but by only five per cent since. It does not, therefore, lie in the mouth of Labour politicians to accuse the Tories of being naturally the party of social victimisation.
There is another important point to be remembered. Whereas in 1970 a crucial — perhaps the crucial — part of the Tory tax programme was the reform of the system itself, during this campaign both Mrs Thatcher and Sir Geoffrey Howe have made it clear that no major changes in the system itself are in contemplation. My own view is that, sooner or later, though perhaps only in a second Parliament, a radical Tory government will find it necessary to make major changes in the British system of taxation. But what is striking about the present Shadow Cabinet, in contrast to that of 1970, is how little their policy depends on the kind of large scale reform of institutions which was at the centre of Mr Heath's campaign nine years ago. This is both important and, I think, wise for, apart from the unwisdom of some of the Heath proposals — such as local government reform — it is also true that his government exhausted themselves on often contradictory fundamental reforms, and found little time for governing.
That being so, there are four things I expect Mrs Thatcher to do early in the life of her government in order to achieve the dual aim of reducing inflation and cutting personal taxation. First, there will be a campaign against waste and expenditure within the bureaucracy, very likely organised and led by non-political outsiders. Campaigns against waste traditionally excite sneers in British politics, but the successes of Mr Leslie Chapman (recorded in his book Your Disobedient Servant), news of the developing police investigation into civil and public service fiddles on office supplies (costing perhaps as much as £250m a year, investigation into which is sternly resisted by the Civil Service unions), and the extraordinarily high administrative costs of the multitude of today's Quangos all indicate that substantial, and perhaps massive, savings can be made in this area.
Second, the high interest rates paid in London to foreign investors (the purveyors of 'hot' money), principally in order to fuel local authority loans, are both a potent source of inflation and a principal cause of the local authority induced part of the taxa tion burden. The biggest indirect taxation borne by the poor, for example, is the rate burden. Through the medium of the Rate Support Grant negotiations (by which, annually, government settles the Exchequer contribution to local government spending) a determined government could both substantially reduce that burden and reduce the inflow of hot money, thus at one and the same time reducing inflation and taxation The corollary is, of course, some reduction in local authority provision, but the dominance of the Tory Party in local authority, and such plans as there are to reduce the notional capital assets of council housing by selling them off should ensure that serious social priorities are maintained.
Third, quite minor increases in social service charges, the reform of the Supplementary Benefits system, the direction of National Health Service priorities, the shifting to the unions of a large part of the social welfare cost of industrial disruption and various other such measure could bring in savings of perhaps £250 million.
Fourth and most important, however, is the reduction of industrial subsidisation. It is here, and particularly in the gigantic and virtually uncontrolled spending of the NEB, that the Tories could expect to find their largest cuts. Of course, Labour will naturally claim that there would be a consequent and massive rise in unemployment. However, it is striking that, even after the IMF imposed just such reductions, there was no marked increase in unemployment. This leads to the conclusion that the starving of the private sector to the benefit of the public is the central factor in Britain's poor industrial performance. Once a government takes the decision a shift from public to private investment takes place very rapidly, and the jobs shift very rapidly too.
The dominant fact about taxation and the British economy can be summarised in this way. Whereas, at the height of its spending to create the Welfare State, the Attlee government took no more than 24 per cent of GNP for the state's use, the percentage now is over 50; and it cannot be said that we have either better social provision or a more efficient economy as a result. But all the instruments are already available to an incoming government to reverse that shift. True, there will be some disruption and some problems. But those most likely to be serious will be created by trade union determination, of whatever strength it may be, not so much to gain benefits for members as to resist any retrenchment on the growth of the state's control over services and individual lives. Such determination should not be underestimated, but an intelligent government should not find it difficult to make clear where the blame lies. And if such a government is at one and the same time reducing inflation and personal taxation it is unlikely to find itself unpopular. Moreover, if such a government takes such steps early in its life it should have plenty of electoral time for the benefits of consequent private industrial investment to show through in the growth rate and increased prosperity — though, of course, the whole programme, and Mrs Thatcher's ability to wait until it bears fruit, will in turn depend on her achieving a comfortable working majority.
All the signs are that savings of the order of £2,000 million annually could be achieved virtually without pain. Larger savings would then be self-generating as government withdraws more and more from intervention in the economy and industry. _ Nobody should underestimate the radical nature of this programme, at least as compared to the development of British economic policy since 1956. What seems to me very probable, however, is that, allowing for some bitter rows with the trade unions which I believe are inevitable, its material benefits will appear much more quickly than even the most devout monetarists now suppose.
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