Tories must face the taxing realities

Where do the Conservatives stand on the issue of tax? With the increased possibility of a Conservative Government in power by next June, Dr Eamonn Butler looks at how Cameron could deal with the mess we find ourselves in.

Another week, another Tory tax pickle.

Last week, David Cameron said that the top rate of income tax might have to go up to 45 per cent. His core supporters were not best pleased – add national insurance, and top earners would be seeing two-thirds of their incomes disappear in tax.

This week, Ken Clarke put his Hush Puppies in it, saying that the Conservatives might abandon their pledge to scrap inheritance tax for most people. That didn’t go well with the core voters either. Nor with the millions of middle-class folk who see Gordon Brown grabbing 40 per cent of the family home when mum finally shuffles off.

Tax has troubled the Tories ever since David Cameron became leader. The focus groups told them firmly that the Great British Public simply doesn’t believe that you can cut taxes and improve public services at the same time.

Cameron was desperate to show that his party was caring, concerned, and committed to public services. So he and his Treasury spokesman George Osborne refused to talk tax cuts, however much their voters grumbled about it.

But with the threat of a snap election in autumn 2007, Osborne had to say something about tax. So, at the Conservative Conference, he muttered that, just possibly, and on a good day with a fair wind, he might, maybe, just think about potentially ending inheritance tax for anyone who wasn’t actually a millionaire.

That produced an immediate surge in Conservative poll ratings that took the leadership completely by surprise. They started to see the wisdom of keeping their core supporters sweet. And yet Ken Clarke’s gaffe shows they are still in two minds about tax.

Their problem is the huge hole in the public finances. Conservatives don’t like taxes, which they think stifle the work ethic and economic growth. But they don’t like governments being in debt either.

And this Government is in debt up to its ears. Taxes have gone up by half (in real terms) since 1997, but public spending has expanded even faster.

Gordon Brown has plugged the gap with borrowing, and then more borrowing – so much, in fact, that the International Monetary Fund has been warning him about it since 2003.

It’s profligacy, not prudence, and it’s left us in the world’s fifth largest public debt hole. The Chancellor, Alastair Darling, says that he owes 41 per cent of GDP – £41 for every £100 we earn. But then he and Gordon Brown have taken on lots of other commitments that he doesn’t mention.

I researched the figures for a new book, The Rotten State of Britain. They are truly staggering. There is the cost of all those new schools and hospitals, paid for on tick under the Private Finance Initiative. Guarantees to Northern Rock and Bradford & Bingley, plus other massive bank bailouts. A £21bn guarantee on Network Rail’s borrowing. A £70bn bill for decommissioning nuclear power stations. Those alone more than double the Government’s debt to 89 per cent of our national earnings.

But dwarfing all of these is £1,000bn of pension promises to public-sector workers, and even more for the state pension promised to every retired person.

All in all, I figure that the Government actually owes five times what Alastair Darling claims – a real national debt of £275,000 for every household in Britain.

Getting us out of a debt hole that size won’t be easy. The Brown-Darling policy of simply spending and borrowing even more in the hope of staving off the evil day is a bit like trying to cure a hangover by hitting the bottle all over again.

The Conservatives’ poll lead makes them pretty sure that, sometime around June next year, they will find themselves saddled with this problem.

The only ways of plugging the borrowing gap are to spend less, or tax more – or both. But they are anxious not to be branded as heartless cost-cutters, and don’t want to raise taxes either. Hence their confusion.

My advice would be for them to stick to their principles. They should say firmly that it was big government, big spending, and big borrowing that got us into this mess – and only less of all that will get us out. That Keynesian public works schemes actually cost jobs rather than creating them. That Brown’s cheap-money boom was a disaster and that we need sound money that keeps its value. And that if we are to create jobs and rebuild, we need less regulation, not more of it.

Cameron worries that bringing the public budget back under control will mean massive disruption and perhaps unrest, as it did in the early 1980s.

He’s right. But then the painful adjustment of the early ’80s was followed by a decade of enormous and real prosperity as the economy righted itself. The hangover cure will be unpleasant. But it is the past excesses that make it inevitable.

To order a copy of The Rotten State of Britain by Eamonn Butler from the Yorkshire Post Bookshop, call free on 0800 0153232 or go online at Postage and packing is £2.75.

Dr Eamonn Butler is director of the Adam Smith Institute. His new book, The Rotten State of Britain, is published by Gibson Square, price £12.

Published in the Yorkshire Post here.