Tuesday, November 01, 2005

Why Davis Is Right On Tax And Spend

It has become a defining issue in the leadership race. DD has set out a clear plan to reduce the state's share of GDP by 2% over the next parliament, equivalent to £38bn pa by the final year. DC has responded by saying it's too early to give such commitments, and all too predictably, his lieutenants have been scurrying around rubbishing DD.

But DD is right and DC is wrong. And to understand why, it's helpful to separate the economics from the politics.

On the economics, many recent studies have shown that higher taxes depress growth and wealth creation. The OECD estimated that a 10 percentage point increase in the tax/GDP ratio reduces trend growth by about 0.5% pa. Reform reckons the impact may be even greater, once you take account of both disincentive effects from higher taxes, and the low (actually negative) productivity growth in the public sector.

Higher taxes make us all poorer, and as DD has emphasised, over the medium-term, lower growth actually means less money available for public services.

Ah, but- say the DC camp- while all that may be true, you can't make such commitments now because nobody knows what state the economy will be in when we finally get to inspect those famous "books". As George himself says, drawing on all his experience: "It is in my view a misjudgement, and indeed David Davis, he's been Chairman of the Public Accounts Committee, I think he above anyone, would want to see the public accounts before he sets out detailed tax policies."

But of course, DD isn't setting out "detailed tax policies". Instead, he's committing himself to a budget rule, Reform's "Growth Rule", which calls for the growth of public spending to be set below that of trend GDP. It is an additional Golden Rule, which plugs the yawning gap in Gordo's version.

Why do we need a spending rule? Quite simply, because all of our experience tells us that politicians and money- our money- are not a safe mix. We need rules because political discretion can't be trusted. Politicians of all persuasions find it much, much easier to increase spending rather than cut it, so we get a tax and spend ratchet. With a rule, they will be forced to actually find and implement those notorious "efficiency savings", rather than just commissioning another report or ten which merely rearrange the deckchairs.

Just as the seventies showed political discretion was hopeless at "fiscal fine tuning" (hence the abandonment of Keynesianism), and the eighties and nineties showed it was hopeless at monetary management (hence Bank independence), now the noughties are showing (er...reshowing) it's hopeless at managing public spending. If we can't get the politicians removed completely, we need clear simple rules to rein in their excesses.

So much for the economics: it's clearly right for Britain. But what about the politics? Forget Britain: would it help get us re-elected?

Well...lower taxes, higher growth...you'd have to figure that would win a few votes. But of course, there's that concern about public services. Wouldn't it simply confirm all those scare stories about Tories destroying the NHS, and therefore lose us yet another one?

The first point is that we really don't have to accept such an outrageous "narrative" (or pack of lies, as we might call it).

For one thing, this plan does not cut public spending. In fact it allows it to carry on growing at an expected 1.5% pa in real terms (ie 1% pa less than trend GDP growth). Certainly it puts pressure on the system to deliver value for money, but any suggestions that it is slash and burn are patent nonsense.

Moreover, we have the time to emphasise and re-emphasise the message DD has already given: lower taxes mean faster growth, and therefore over the medium-term potentially more money for public services- as in Ireland. We have at least three years to make the case.

Ah, yes, but...no, but yes, but...what about the polls? Don't they show that hospitals and schools are the number one issue of concern, and tax is only number 437?

Hmm...true. But, first, polls have never shown people wanting tax cuts at the expense of teachers and nurses etc- even back in the eighties when they were voting for tax-cutting Maggie, or in 92 when they voted against tax-raising Kinnock. It just hasn't been the sort of thing decent people have wanted to own up to. They find some other rationale for voting in tax cutters (and after Gordo's forthcoming post-Election tax grab- his third- they'll have an even stronger incentive for doing so).

Second, DD's spending plan is part of a much broader public/private policy package that includes radical choice/competition reforms for public services. And as the definitive Anthony Wells points out, polls do show growing support for that. So there is absolutely no need to allow ourselves to be painted into that "one-dimensional obsessive tax-cutters" corner.

Finally, we're not operating in a vacuum. By the time of the next election the country will have had 13 years of rising taxes and failing services- 13 years of Labour misrule. Yes, we know all about not relying on rescue by Labour bungling or a recession, but tax by tax, disappointment by disappointment, Britain will once again be looking for a real alternative.

Firm control of tax and spend has always been a core Tory proposition. Only DD has spelled out how he would deliver on it, and how it can be combined with radical public service reform package so as to offer both a revitalised economy and a better deal for Britain's vulnerable.

Timeless Conservative principles applied to the problems of modern Britain.
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