Time to cut taxes – and spending

I was delighted to read in the Sunday Telegraph that George Osborne wishes to adopt the tax and deregulatory proposals from my Economic Competitiveness Report. They concentrated on offering the most attractive climate to entrepreneurs and businesses, old and new, domestic and foreign. If we do that, there will be more jobs, and higher tax revenues.

The problem for the government is that its own bad management of the public accounts in recent years has left us heavily overborrowed and short of cash at exactly the time when we need tax cuts to stimulate growth. The USA can afford tax cuts because its budget deficit has been coming down in recent years. The UK fears it cannot afford them, because the deficit is large and rising. As George has pointed out, we did not use the good times to get the public sector into shape, so now we need lower taxes the budget apparently does not allow it.

UK consumers are experiencing an unpleasant squeeze. UK companies are facing taxes higher than in leading competitors like China, Hong Kong, the USA and even now parts of the EU like Holland. We are facing much more intrusive and expensive regulation than many of the leading competitor nations. The Brown Chancellorship began relatively well, controlling public spending, leaving room for growth in business and consumer prosperity. Slashing capital gains tax to 10% for many business investments was great, giving us a competitive edge.

Unfortunately he then decided to go on a mad spending spree in the public sector, without asking how he would achieve value for the money spent. So much of it was blown on higher public sector pay, shorter hours of working, more quangoes, more civil servants, more problematic computerisation schemes and more management consultants. Productivity in the public services in many cases fell. As a result borrowing surged, consumers were squeezed, and the Chancellor sought many ways to increase taxes by stealth. We had an increase in the tax on employment, bigger taxes on pension funds, and a big increase in oil taxation.

So this week when the Bank of England Monetary Policy Committee meets they will not have the US luxury of being able to slash interest rates by 75 or even by 50 basis points, and they will not be able to work with a tax cutting government to stimulate growth in the way the Fed can. If they are truly independent they should make their 25 point cut – or keep rates on hold – and tell the government that more needs to be done, but can only be done if public spending is brought under better control.

The government should intensify its attempts to cut the growth rate in public spending by:

1. Introducing an immediate freeze on all civil service and quango recruitment, seeking to replace leavers from within the swollen ranks of employees. Only if a Minister agreed a special case should external recruitment be permitted. This would not apply to front line personnel in the armed forces or police, nor to teachers and social service staff recruited by local government.

2. Review all central and quango computerisation projects with a view to coming up with total savings of at least 20%.

3. Cancel large projects like the ID computer scheme.

4. Place a ban on all new consultancy contracts throughout central government, unless Treasury special permission is granted for a new one.

5. Reduce the advertising and communications budget by 20%.

6. Put in place proper banking controls over the Northern Rock lending and begin to obtain repayment of money advanced.

7. Implementing the new tougher approach to benefits to those who are out of work, withdrawing them where a person has turned down the offer of a job.

8. Announcing a freeze on the total annual allowances that MPs can claim for the rest of this Parliament.

9. Implementing green measures throughout the government estate to cut energy bills – better heating controls, better insulation, systems to turn lights and heating off when buildings not in use etc.

10. Producing a plan to cut the size of the property estate in line with falling staff numbers as the staff freeze starts to bite.

If the government could achieve savings of around £10 billion a year from these measures over the next couple of years or so – as it could do – it would have more scope to live within its own borrowing controls. It could also, on the back of such better management, make the cuts in business tax needed to stimulate growth and enterprise. Some of these cuts would quite soon bring in more revenue form the increased volume of investment and business activity.

Unfortunately in the UK debate there are two myths which constrain sensible action. Myth number one is you can only cut public spending by having fewer teachers, nurses and police. We do not need to sack any of them – we have far too many regulators and administrators that we do need to reduce by natural wastage.
Myth number two is that cutting tax rates always loses you revenue, when evidence abounds that after a gap revenue surges if you cut the right taxes by enough.

It is time to disprove both myths, by cutting spending and taxes at the same time, as soon as possible. I look forward to joining George Osborne in the lobby to vote against the damaging increase in Capital Gains Tax this government is still proposing.

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  1. Richard
    Posted February 3, 2008 at 5:46 pm | Permalink

    Absolutely first rate. If the conservatives can demonstrate to the electorate that tax revenue and good public services can be maintained awhile on the other hand cutting taxes as they can be, then surely they are ready for government once again.

  2. Posted February 3, 2008 at 6:00 pm | Permalink

    Very good news, the tories need to demonstrate that they have greater ambitions for the economy & thus the country, than Labour have managed. It might have been courteous of Mr Osborne to have told you before the Telegraph.

    I agree with your new savings points particularly #1. There may be constitutional barriers to not putting the hiring limitation on teachers & social workers & electoral one on the teachers but I would prefer to see them done too. School roles are falling & the worldwide evidence is that lower class sizes are not a significant factor in attainment. While everybody is, in theory, in favour of cutting government costs I think cutting the number of people employed by government is, in the long term, a necessary condition tyo maintaining it. A small state sector with above average pay but no "tenure" would be likely to be much more effective than a large, safe, poorly paid one. The latter would always exert pressure for more spending – the former might not.

  3. Mark Williams
    Posted February 3, 2008 at 6:13 pm | Permalink

    Banning all consultancy contracts except with Treasury permission puts all the power in the hands of the Treasury, but doesn't stop the spending of money.

    How about making it a requirement that every consultant engaged under a consultancy contract is designated to be equivalent to a particular civil service grade. The maximum hourly rate paid for consultancy services would be a percentage (say 200%) of the maximum salary band for that grade. The percentage would allow for the cost of overheads and availability, but would reduce through the life of the contract.

  4. Posted February 3, 2008 at 9:28 pm | Permalink

    Mr Redwood
    Excellent blueprint for savings.
    Could you kindly comment on whether the following idea is feasible and also practical?
    In my view it is absurd that low paid people should pay any tax before they have reached their subsistence level. The 10% band is just about to disappear, so they will pay 20% on all their tax. People can't subsist on say

  5. Posted February 4, 2008 at 1:01 pm | Permalink

    Thank you for the courtesy of a reply. I am not sure if the reply relates to both my points.
    I believe the tories should aim to do two things (i) simplify personal (and corporate) taxation and (ii) start their term in government by focusing on the needs of the least well off in our society. I think it is obscene that somebody who actually gets a job – but only a low paid one – is unable to afford to live because of tax and NI and has to ask for benefits. That is bureaucratic and demeaning and vastly different from someone who genuinely is unable to work who has to be given benefit.
    Reply: I agree with your general sentiments – we need lower taxes, and the lower paid especially need lower taxes.

  6. Posted February 4, 2008 at 2:38 pm | Permalink

    In essence those who lose would scream & those who win would barely notice. This is the bugbear of all reforms.

  7. David Hannah
    Posted February 4, 2008 at 3:52 pm | Permalink

    David Belchamber, what you propose is very similar to the

  8. Posted February 4, 2008 at 5:55 pm | Permalink

    David Hannah – thank you for your comments; could such a reform be made almost self-financing, if the threshold were adjusted down a bit?
    Please do continue this discussion with me and others on Conservative Home, as it is discourteous of me to use John Redwood's blog for my ideas.
    He might excuse my discourtesy if I wish him a successful cricket season!

  9. Posted February 5, 2008 at 12:13 pm | Permalink

    Dear Mr Redwood

    I agree with this blog in many ways. The problem I have with it is you are proposing to continue feeding the "monster" that is at the root of the issues you describe. That is, the current fiscal system.

    Have you thought about the alternative? We are proposing to "debug" the current fiscal system at its heart. Rather than reinforce it by adding small modules to mitigate the issues you describe, that ultimately only contribute to a bigger "monster".

    To be truly successful, you have to look beyond what satisfies your interest or charter group and seek what will work for everyone. A positive sum game in economic terms. David Willetts alluded to this yesterday on Start the Week, Radio 4. I also questioned it with him at the RSA recently which may have prompted his radio talk.

    If you are interested in hearing more please contact me. We would be delighted to show you our proposal

    Best regards
    Robin Smith http://www.gco2e.com

    Reply: BY all means send me your proposal.

  10. Cliff
    Posted February 5, 2008 at 3:51 pm | Permalink

    "I think it is obscene that somebody who actually gets a job – but only a low paid one – is unable to afford to live because of tax and NI and has to ask for benefits."

    This is also the taxpayer subsidising private companies. If the company do not pay the local going rate and someone is forced to take a national minimum wage job, then we are in essence subsidising private companies by effectively making up the wages for that low paid worker. This is what I think is wrong with a national minimum wage. What good is

  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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