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David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the 2019 general election.
It is an uncomfortable fact that, after 13 years of Conservative -ed governments that we have a record tax burden. Some of the Tories’ natural supporters evidently feel let down. Poor poll ratings, some will argue, are as a consequence of putting up taxes. If, as appears likely, the Party goes into opposition after the next general election, we can assume that many within it will argue that re-establishing the Conservatives’ tax-cutting credentials should be a priority.
It is perhaps in anticipation of that debate that last week Liz Truss set out her defence of the “mini-Budget” of 23 September 2022. Part of the reason why it ended badly, in her view, was that “large parts of the media and the wider public sphere had become unfamiliar with key arguments about tax and economic policy” and that “over time sentiment had shifted left-wards”, in part because Conservatives “had failed to make these arguments enough since 2010 – instead triangulating with Labour policy”. She also notes that there “a broader consensus in favour of raising taxes”.
One can see how this view could prove to be increasingly influential if both strong economic growth and political popularity continue to be elusive. As it happens, I am sympathetic to concerns about higher Corporation Tax rates but unfunded tax cuts is not a viable political position, especially after the events of last autumn. If the aggregate amount of tax is to be reduced, the question that really needs to be addressed is whether spending as a proportion of GDP can be reduced.
This is a much harder issue. Truss and Kwasi Kwarteng ducked it in the mini-Budget. Even in her Sunday Telegraph article, Truss makes only a passing reference to spending policies. “We agreed not to reopen the settlement of the most recent spending review, which would only have led to more demands for spending” she said. “Instead, we would look at specific measures that would bring down costs over time, such as raising the pension age and reforms to the benefits system.” “Looking at” measures – either unspecified or not delivering any savings for decades – will not be enough to demonstrate fiscal credibility.
To listen to some of the contributions to this debate, there is something of a disconnect between what has happened to Government spending over the last 13 years and the rhetoric. It is simply incorrect to characterise the last few years as a period of plentiful spending.
Following the global financial crisis, we found ourselves poorer than we thought we were. We could not continue as we were if the public finances were to become sustainable. This required a combination of real terms spending cuts and tax rises. By far the greatest share, 80 per cent, was found through spending. Hardly a drift to the left.
Incidentally, not all of the spending cuts proved to be sustainable. For example, as Chief Secretary to the Treasury I remember the then Justice Secretary arguing that we needed to reverse some of the cuts in the numbers of prison officers. On this occasion, Truss made a persuasive case and we increased spending accordingly.
When it comes to the public services, too often a Government’s commitment is measured by inputs, not outputs. In particular, there can be too much focus on the number of nurses, doctors, police officers and soldiers and so on when there may be new ways of operating that require fewer people. But even accepting the point, a lot of what the public services do is relatively labour intensive. We need people to do them. The cost pressures here will be greater than in areas of the economy in which automation can play a bigger role.
Of course, some parts of the public sector have done better than others, most significantly the health service now has a much bigger share of spending than it did in 2010. This, however, largely reflects demographic pressures as a growing proportion of the population reach the age when they become more in need of healthcare. This, by the way, is the cohort upon which the Conservative Party is heavily dependent.
There is certainly a case for spending money more effectively in the NHS, but it is not politically credible to argue that there is scope for cutting spending. The reality is that the question is how much more additional expenditure will have to be found in future years.
There is criticism that the Government was willing to turn on the taps too much in terms of Covid support and to address the surge in energy prices caused by Russia’s invasion of Ukraine. It is certainly true that the response to Covid added to our debt but the purpose was to avoid lasting economic scarring, which it largely did. The energy support package would, ideally, have been better targeted, but it has proved to be less expensive than initially thought.
The main point, however, is that these were one-off costs and what really matters, in terms of the state of the public finances and the long term requirements for tax revenue, is the permanent impact both on the size of the economy and on spending.
When it comes to spending as a percentage of the economy, we have to look at both sides of the equation. The financial crisis, Brexit, Covid and Ukraine have all had detrimental impacts on GDP growth. As I argued on this site a couple of weeks’ ago, we can take measures to improve growth (and ameliorate the damage caused by one of these factors, in particular) but they are politically difficult. We cannot assume a return to higher growth, in which case our focus has to return to spending.
The period after 2010 was genuinely a period of very tight expenditure control which – putting aside the one-off Covid interventions – largely remained in place until the October 2021 Comprehensive Spending Review. But the more generous cash settlement announced at that point was based on an assessment of inflation remaining at two per cent, not reaching double figures.
Such are the inflationary pressures that even Truss and Kwarteng did not dare to re-open the settlements for fear that this would end up with spending more, not less. As for public opinion, the most recent British Social Attitudes survey shows that 52 per cent favour higher taxes and higher spending, 40 per cent favour the status quo and 6 per cent favour cuts to taxes and spending.
To make a credible case for lower taxes in aggregate, one has to make a credible case for lower spending in aggregate. It is not enough to point to relatively small parts of expenditure (“diversity and inclusion officers!”) and claim that this gives you an answer.