IT WAS A THING of beauty. This is how it would have worked: within a year of taking office we would have ended analog television. Then, within months, we would have sold off the available spectrum in a multibillion-pound deal. In our second year of government we would use this money to endow universities, setting them free from state funding. By our third Budget we would then have been able to give out as a tax cut all the money that we had freed up.
Brilliant, eh? The only thing wrong with it was that it was completely impractical.
I’ve spent many months of my life, months I will never get back, as the Conservative Party director of policy devising Tory tax plans. Some of the ideas we came up with were robust enough but didn’t quite work politically. A number were as complicated and unconvincing as one of David Blunkett’s excuses. But I flatter myself that none of them were as shoddy a piece of work as the new tax plan that has been issued by David Davis in an attempt to revive his campaign for the Conservative leadership.
Mr Davis’s campaign team has argued that the election of a Conservative leader should be about substance rather than style. Fair enough. So let’s subject the Davis tax plan to precisely that test. Are his proposals sound?
Last week Mr Davis announced that if he were to be Prime Minister, by the end of his first Parliament his government would have cut taxes by £38 billion. He arrives at this figure by calculating the difference he could make to public spending by slowing its rate of increase, so that it grows less rapidly than the economy. By 2014-15 he wants public spending to represent 40 per cent of national income rather than 42 per cent. If the economy grows at its trend rate — hey presto, £38 billion of tax cuts.
He has obviously made a number of heroic assumptions here — the end date of the first Tory Parliament, the rate of growth of the economy over the next ten years and the size of public spending at the end of this Parliament, for instance. If he has any of these wrong, his plan will be derailed. But this is not the most important problem with his proposal. The central problem is an intellectual confusion.
In common with much of the Tory discussion of tax over the past few years, Mr Davis’s policy platform confuses three quite separate things — the size of the State, the size of public spending and the size of people’s tax bills. Most Conservatives believe that rolling back the frontiers of the State naturally decreases public spending and that with lower public spending, tax bills can automatically be cut. It would be convenient if it were true. Sadly, it isn’t.
Take school choice, quite rightly an important part of the Davis programme. To allow private providers to supply schools to taxpayers undoubtedly reduces the size of the State, which will no longer own all schools. Yet almost every voucher plan ever devised will require increased spending to make it work, certainly in its first few years. The cost of a voucher programme was a major reason why the Conservative Party did not advance the idea in its 1997 manifesto. I know, because I suggested we do just that.
In the long run, public service reform may lead to reduced public spending as services are provided more efficiently. But in the short to medium term, and certainly during the period covered by the Davis tax plan, it is very likely that any reform will cost money rather than save it.
Let’s just say, however, that I’m being pessimistic. Let’s say that Mr Davis succeeds in reforming public services and making deep cuts in the rate of growth of spending at the same time. Would this mean he was able to cut taxes by the amount he has promised?
Not necessarily.
If you’ve been following the Tory leadership campaign more closely than is healthy for you, you may have noticed that while the Cameron camp alleges that Mr Davis has simply dusted down the public spending figures used in the recent Tory election campaign, Mr Davis claims that his tax cuts are far larger. Who is right? Both of them. And that is because cutting public spending and cutting taxes are not the same thing.
At the last election the Tories promised, as Davis has, to reduce public spending to 40 per cent of national income. Yet because they published specific figures for tax cuts only quite close to the election, they were able to estimate how much of their savings they needed to put by to reduce central government borrowing. By eccentrically deciding to write his March 2014 Budget in October 2005, David Davis is unable to make this calculation. So he promises to return in tax cuts every penny he saves. This is — how can I put it? — not a very good idea.
You may think that none of this matters because David Davis isn’t going to win. But it does, and not just because a Davis win is still just about possible. It matters because it is essential that the Conservative Party gets its head straight about these key economic issues. The next Tory leader may have to choose between offering voters economic stability, radical public service reform or sizeable tax cuts in a first Tory term. The Tories cannot blithely assume they will be able to offer all three at once.
In the first weeks of his leadership campaign it seemed as if this was the sort of thinking Mr Davis was quite capable of. In the past week he has chosen a different path. With his tax plan and a series of other policy announcements he has, quite contrary to the accompanying spin, chosen headlines over substance.
Some Conservatives whom I greatly respect gave Mr Davis their support on the ground that he might prove a modernising leader. This hypothesis has now been disproved. They should not feel bound to him any longer.
daniel.finkelstein@thetimes.co.uk
