David Cameron and Gordon Brown sought to outflank each other on the key battleground of tax yesterday – in the process leaving themselves open to attack.

A Conservative proposal to cut payroll taxes for businesses that take on unemployed people was dismissed by the Prime Minister, who argued that it would not inject new cash into the economy. Mr Cameron, meanwhile, cited Mr Brown’s own speeches as he rejected unfunded tax breaks, insisting that “irresponsible” handouts would risk Britain’s stability.

The global downturn has prompted governments to consider borrowing to lower taxes. But Mr Cameron says that Britain cannot afford to add to public debt – which could put the Tories in the unfamiliar position of having the least aggressive tax-cutting stance. He insists that unfunded tax cuts now will mean higher levies later, a claim that Tony McNulty, the Employment Minister, appeared to confirm when he agreed that taxes would have to rise “over the longer term”.

But Mr Brown insisted that the very point of using tax cuts to stimulate demand during a recession was to inject new money into the economy, rather than recycling funds already earmarked within Whitehall budgets. “You have to take action that is initially unfunded. That is the idea of a fiscal stimulus,” the Prime Minister declared at his monthly press conference.

Mr Cameron sought to reassure his party – and convince voters he is concerned about their plight – with a proposal for tax breaks for employers funded from existing spending plans.

The move was given at best a mixed reception from business leaders and experts in what threatens to be a significant blow to Mr Cameron’s attempts to revamp his economic policy.

Mr Brown again fuelled speculation that Alistair Darling would announce tax cuts in the PreBudget Report, expected this month. Such a move would exploit Conservative tensions over the party’s economic policy, which rejects unfunded tax cuts and increased public borrowing while pledging to match Labour’s existing spending plans.

At the Conservatives’ annual conference both Mr Cameron and George Osborne, the Shadow Chancellor, insisted that they would not change direction, arguing that Britain should return to the “fiscal conservatism” of Margaret Thatcher. They believe their position will be vindicated when the full effects of the recession are felt.

But, with tax cuts now expected this month and amid the gloomier economic backdrop, the Tory leadership wanted to signal that they too would help people through the downturn. Mr Cameron and Mr Osborne proposed national insurance holidays for companies that hired the unemployed, claiming the measure would create 350,000 jobs. Diverting cash that would otherwise be spent on benefits into the tax cuts would not add to public debt but could pump £2.6 billion into keeping people in work, Mr Cameron said.

Unfunded tax cuts would “saddle this generation and the next with a burden of debt that could take a decade or more to pay off”. Repaying debt would take cash from schools and hospitals, slow economic recovery and lead to higher taxes in the longer run, Mr Cameron said.

There was scepticism over the impact on employment levels of such tax breaks, however, and some experts questioned whether the scheme could be funded from benefit budgets.

David Frost, of the British Chambers of Commerce, said: “With unemployment continuing to rise sharply, companies are not in a position to think about recruiting new staff. Businesses are shedding staff. This would have been a valid welfare-to-work initiative in better times, but it is not a survival tool during a severe downturn.” The Federation of Small Businesses said the proposals “could be bolder”. John Wright, its chairman, said: “Small businesses would be better helped by long-term reductions in national insurance contributions rather than short-term breaks. Encouraging businesses to employ those out of work for three months could provide a disincentive to take on those entering unemployment.”

The Conservative plan is based on costings from the Government’s own welfare adviser, David Freud, who calculated that the Treasury saves £8,100 a year when someone on jobseeker’s allowance leaves the dole queue.

Tory tax plan

A one-year, £2,500 tax credit will be offered to all private companies taking on someone receiving jobseeker’s allowance (JSA) for at least three months. The Tories say that this will create 350,000 jobs

Claim 1 The Exchequer saves £8,100 per year for each person who is working rather than claiming JSA

Potential problem 80 per cent of JSA claims last less than six months so the savings for most people finding work will be less than £8,100

Claim 2 International examples of similar schemes show that they create 33 per cent more jobs

Potential problem These schemes were conducted abroad, in one case 30 years ago, and not during a global economic downturn

Claim 3 The whole scheme is revenue-neutral because it is funded from benefit savings

Potential problem As with Claim 1, it is not clear that the full £8,100-a-year saving per person can be clawed back. Also, such a claim does not take into account the high administrative costs of such a complex scheme

Sources: SMF; CIPD; Conservative Party

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