Monday, March 23, 2009

Abhoring A Vacuum

Tyler spent most of the weekend reading Cam's speech on Fiscal Responsibility with a Social Conscience.

It's actually not that long, but Tyler found he couldn't read more than a couple of sentences at a stretch. Beyond that, he was overcome by waves of dizziness, nausea, and sharp pains in his joints: it seems his body is just not equipped to deal with a vacuum, especially an economic policy vacuum.

The speech has already caused a lot of pain for its lack of ambition on public spending cuts. And reading it, we were unable to find anything - apart from abandoning the ID cards and child database projects - that could not have come from the lips of the present government: just more arm-waving about efficiency drives, cutting waste, bashing "quango fat cats", gripping tax credits (somehow - TBC) etc etc. We've heard it all a million times, and it doesn't cut the mustard.

On taxes, traditional Tories are in despair. The speech offers nothing to tax cutters, and Lord Tebbit reckons that policy is being driven by focus groups. Why else would George have pledged to go ahead with Labour's new 45p top income tax rate, even though it will raise at most £2bn pa? As Tim Montgomerie says:

"We are told by the Tory leadership that it's too early to say what a Conservative government will do on public spending but it's not - apparently - too early to say we'll accept increases in taxation."

But the most depressing thing - the vacuum at the centre of Cam's speech - is the absence of any recognition that tax cuts are an essential condition of long-term sustainable recovery.

Of course, we have a debt crisis, and of course, public borrowing must be reduced. But the single most important driver of that reduction will a return to economic growth, which will lift tax revenues and cut welfare spending.

According to HM Treasury's rule of thumb, a 1 per cent increase in output cuts public sector borrowing by just under ¾ percentage points of GDP - which in today's money is £10bn pa. Which is five times more than George can even hope to raise from his new 45% tax band - and the latter makes the former less likely.

Hobbling the recovery with higher tax rates is the very last thing any government should be doing, least of all a Tory government.

As we've blogged many times, what we need from Dave and George is a proper fiscal strategy. Sharing the proceeds of growth was never more than a good soundbite for good times. The lean and hungry times we now face demand some policy substance.

The focus must be on Labour's bloated public sector - we're all agreed on that. But what we need is a clearly specified plan setting out a quantified path for cutting public spending as a percentage of GDP over the medium term. Everybody - our international creditors included - would then know where we stand.

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