Share the proceeds of saving


Some time, the Tories' policy on tax has been to 'share the proceeds of growth'. As the economy grew, the additional tax proceeds that resulted would be shared between higher spending on public services and lower taxes. When the economy was actually growing, it seemed like a sensible policy. Over a couple of parliaments, it could have substantially reduced the state's share of GDP, without drawing any criticism for 'cutting services' – a sensitive subject for David Cameron's 'compassionate conservatives'.

Unfortunately, a looming recession has upset the Tories' best-laid plans. Given the likelihood of there being no growth to share the proceeds of, people have started to wonder whether a Conservative government would actually raise taxes to meet its spending plans.

I hope not. Yes, a downturn will depress tax receipts and unemployment may drive up social budgets. But there is plenty of fat to trim from the British state. More than enough, in fact, to be able to 'share the proceeds of saving' between lowering taxes and reducing public debt, without compromising core services. The Tories may be right not to offer up-front tax cuts at this stage, but they should also be clear that taxes will only go one way on their watch, and that's down.

Still, I am pleased the Cameron and George Osborne, his shadow chancellor, have declared themselves deficit hawks, rather than supply-siders. Yes, I strongly believe in the Laffer curve, the idea that tax cuts can spark economic growth and thereby offset revenue loss. But it's not a panacea. Firstly, not all tax cuts have equal dynamic effects. The most pro-growth are those on capital gains, corporate profits, and high-income individuals – all of which are a tough sell when people are struggling to make ends meet. Secondly, the 'crowding out' of private capital by excessive public spending is a much greater drag on the economy than tax rates are.

Cutting taxes and running up deficits to finance continued spending, while blindly hoping that economic growth will fill in the gaps, is terrible policy. Spending has to be brought under control first.