Stealth tax cuts
History may not judge the Northern Rock fiasco to be Labour’s Black Wednesday. Instead, the banking saga might yet become to Gordon Brown what ‘sleaze’ was to John Major. The potential symmetry is one of form, not content (there is no hint of personal corruption in the saga of the collapsed bank). Just as ‘sleaze’ became the ubiquitous shorthand for the aura of jadedness, selfishness and obsolescence that clung to the Major regime, so the words ‘Northern Rock’ could easily become a catch-all means of expressing the sense that this government has lost the plot, squandered its reputation for competence and planted itself firmly on the back foot.
This week, David Cameron and George Osborne made a tactical decision to portray the nationalisation of the bank as an outright calamity rather than merely a severe embarrassment for Gordon Brown and Alistair Darling. On Monday the Tory leader declared that the decision was ‘a disaster for the British taxpayer, a disaster for this government and a disaster for our country’. Strong words, seen by some as positively hysterical. But Mr Cameron was not succumbing to hysteria. He was making a political calculation about the months ahead.
In manifold ways, this government no longer seems to be in control of its own destiny, let alone the destiny of the country. On Northern Rock, capital gains tax and nondoms, it has vacillated and reacted when it should have been decisive and proactive. The Prime Minister’s response is to contrast his own flinty approach at a time of global financial turmoil with the callow ‘opportunism’ of the public schoolboys across the dispatch box. He protests that he is taking the necessary ‘long-term decisions’ to preserve the fundamental stability of the UK economy.
This may yet prove a rewarding if gruelling strategy. But — self-evidently — it depends upon the economy being as stable as Mr Brown says it is. The number of homes repossessed rose by 21 per cent in 2007 to the highest figure since 1999, and is widely forecast to increase again this year. Inflation is rising. Worst of all, the public finances are in a deplorable mess: Britain has a fiscal deficit of more than 3 per cent of GDP, higher than any other large developed nation.
The Tories are gambling on Mr Brown being engulfed by chickens coming home to roost in the next 12 months. They see Northern Rock as the symbolic ‘disaster’ that will become an emblem to the electorate of much broader incompetence and lack of direction.
Perhaps it will. But the Conservatives themselves face their own strategic dilemma, and one that is intimately connected with the economic context. The people of this country are scandalously overtaxed, with scandalously little to show for it (other than the acquisition this week of a wrecked bank). Mr Osborne showed last year with his promise of inheritance tax cuts that voters can still be energised by the idea that, on principle, the state should take less of their earnings and of the wealth they hope to hand on to their children.
Within and beyond the Tory party there are many who wish he would go further. The shadow Chancellor and Mr Cameron are both instinctive tax-cutters, rather than the covert social democrats of caricature. As Mr Osborne said in a speech to Policy Exchange on 15 February: ‘I think the state consumes too much of the nation’s income, and then spends too much of what it takes badly.’ And lest we forget: he is already committed to cuts in inheritance tax, stamp duty and corporation tax, and to the hypothecation of green tax revenues to tax cuts for families.
But the Cameroons are also veterans of three successive general election defeats in which Labour — mendaciously, but effectively — alleged that Tory tax cuts would lead to the demolition of schools and hospitals. The veracity of these claims is neither here nor there. They did the electoral trick. The internal Tory debate on tax — reassurance versus radicalism — will continue to rage. But the bigger picture is practical rather than ideological. An incoming Tory government is likely to inherit dire public finances in which the scope for sweeping tax cuts is uncertain to say the least. Much has been made of Mr Osborne’s commitment to match Labour’s spending plans for three years. But the crucial rider — little noticed, but repeated emphatically in his Policy Exchange speech — is that the Tories would ‘review the final year when we know the state of the public finances’. In other words: watch this space.
If Mr Brown plays it long and does not go to the country until 2010, Mr Osborne’s pledge would in any case be on the verge of expiry. This means, in practice, that the taxand-spend policy which a Conservative government would actually implement is very far from decided.
Messrs Cameron and Osborne might be inheriting an economic basket case, as Margaret Thatcher and Geoffrey Howe did in 1979. Only then will it be possible for them to set out detailed fiscal policy. For now, the direction of travel is what counts: electoral reassurance underpinned by the promise of eventual policy radicalism. Mr Osborne’s message seems to be: I am on the side of the angels, but don’t expect me to help Gordon with his election campaign slogans, or to make outlandish promises that the books will prevent me from delivering in office.
The shadow chancellor is right that the politics of taxation is more subtle and hazardous than it has ever been. How to wean the voters off the bloated postwar state without scaring them into perpetual bondage to Labour? This will require a long process of political education, relentless emphasis upon value for money, and meticulously crafted Tory policies that are as resistant as possible to Labour misrepresentation. After 11 years of stealth taxes, it is time for some stealth tax cuts.
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