If you are making your pitch to become the next leader of the Conservative Party, you have to consider your audience. In fact, you have to consider two audiences: first the members of the Conservative Party in the Commons and secondly – and perhaps more crucially – the membership of the Conservative Party in the country. Indeed, it is the Tory party membership who will choose between the two front runners to emerge from the still crowded field.
Promises of tax cuts from the Tory leadership candidates
Grassroots membership of the Conservative Party today numbers about 150,000 (in 1955 it numbered 2.8 million) and this residue is mainly male, white, wealthy and over pensionable age. As the Brexit bacillus infected the Conservative Party many decent people chose to leave or were forced out e.g. Dominic Grieve, Rory Stewart, Anna Soubry. What remains is a Brexit-supporting rump of ideologues. And what tickles their fancy is talk of tax cuts and deregulation – the push forward to make the UK ‘Singapore on Thames’.
Given the above, it is not surprising that ten out of the 11 initially declared runners in this leadership contest have made cutting taxes the lead point in their personal manifesto. They know which audience they are pitching to.
Two questions immediately arise: first, how will the UK economy respond to tax cuts; and second, how well placed is the provision of public goods and services in the UK to cope with any shortage of funding caused by tax cuts (even where that shortage might be just a medium-term phenomenon)?
Will tax cuts stimulate the economy?
The assertion that cuts in tax rates will stimulate the economy relies heavily on an idea casually thrown out (and now discredited) by an American economist, Dr Laffer. The ‘Laffer curve’ suggested that cutting taxes in the short run might have a positive impact on growth and subsequent tax revenues. But even Dr Laffer was sceptical.
There are two key problems with the idea that cutting taxes will stimulate the economy. Firstly, tax cutting is only likely to be effective if the upper rate of tax (the marginal rate) is 70% or higher, which is way above what we have in the UK at 45%. Secondly, as the below graph from the Congressional Budget Office shows, tax cuts cause a budget deficit. In other words, they work very badly.
How will our public sector cope with tax cuts?
On the second question there is overwhelming evidence that many public services in the UK have been run into the ground. Public sector workers have had their pay frozen in recent years and hence in real terms are worse off given inflation
For nearly a decade now the NHS has been run ‘hot’ – utilising 90% of its capacity in contrast to the German healthcare system that is deliberately run at 60%. The Covid pandemic has placed immense strain on an already overstretched system. There are no easy wins here for cost-cutting to match funding cuts forced by tax cuts.
Likewise, the UK social care system remains desperately underfunded, meaning more money needs to be found for it. Over in education, the shortage of money has meant that the bill for necessary repairs to school buildings has now risen to £11bn. And the list goes on. Under these circumstances it is highly irresponsible to advocate tax cuts.
Writing this week in Mainly Macro, Simon Wren-Lewis rightly commented:
“The necessity of tax cuts has become an article of faith among Conservatives just as it has among Republicans. Tax cuts when the NHS is on its knees is the last thing we can afford in the UK.”
Given the libertarian ideologies of many of the Tory leadership candidates, with their links to the US right-wing think tanks, it’s not unreasonable to question whether impoverishing the system by underfunding caused by tax cuts will lead to the excuse that we need to ‘marketise’ or ‘outsource’ large parts of our welfare state. In short, by following this policy it is likely we will be driven to ‘Go American’, and abandon the crown jewel that is the British welfare state.
How to pay for the rise in government spending
The pandemic caused a considerable rise in government spending that not only required increased government borrowing but also led to tax increases. In 2019, the UK government ‘tax take’ from the economy as a percentage of gross domestic product (GDP) was 32.98%, just a fraction below the OECD average of 33.84%. The upper outliers here were Sweden with 43%, France with 45.4% and (top) Denmark with 46.3%. We may also note that a 2016 UN survey – the ‘World Happiness Report’ – found that the country with the highest level of happiness was Denmark.
For too many Conservatives there is a tendency to regard taxation as almost a dead-weight loss and something to be minimised. All too often we talk of ‘the burden of taxation’ and fail to look to the other side of the coin – decent public services. There is an argument that we should take a leaf from the book of Denmark and combine higher taxation with higher happiness. (And coincidentally – where taxation is progressive, there is also greater equality).
In 1852 the Governor of Vermont in the USA appointed a committee to examine taxation policy. The committee’s report contained for me the immortal words: