Let’s cut through the tax and spend debate

The BBC this morning started to do the government’s bidding again by presenting the tax and spend position in the usual Labour government way. As we have been taught, the government’s spending totals are designed as a trap for the Conservatives. Indeed, that is probably their only purpose now, as they are works of fiction. If Conservatives say they will match the totals then we are told there is no scope for the tax cuts the public and the economy so clearly needs. If the front bench were to say it wanted to spend less than Labour, the government then chooses the most idiotic and inappropriate cuts in spending for the Opposition – ones which they would never adopt – and the BBC dutifully peddles these to the electorate.

The government wants us to believe that all the spending they are incurring is absolutely necessary. Indeed, listening to them you would think that practically all the money goes on the NHS and the schools. We rarely hear these days of the biggest block of spending, the massive benefits bills which Labour used to call the price of “economic failure” when it was in opposition. We are never told how much it costs to run the civil service and all the quangos, following a decade of huge increases in staff numbers to run even the lowliest government department. We will now be told that the current spending total is “eye wateringly” tight – it is after all a mere 2% over and above the rather lively inflation rate the government has generated. What would a housebuilder, an estate agent, a surveyor or a property business give for a guaranteed 2% real growth this year?

None of this guff from the government is true, and I trust most of the public has now seen through it. The only thing we can agree about is that there have been some very large increases in spending in the period 2001-2006, and the rate of increase in medium term plans is now lower. However, it is quite likely this year there will be large overruns, so we are not in practise keeping to the 2% growth targets. Northern Rock was an additional item which has still only partly gone through the central government books (Supplementary estimate £5.3 billion). The compensation package for the Income Tax increase needs to be added in (£2.7 billion so far) and anything from the 42 days and other packages that was not in the original figures. On honest accounting there must be an additional £10 billion or so this year to add on. I expect the governemnt to go on spending and borrowing like there’s no tomorrow, whatever the plans say.

The public is now far more sensible than their government. They know that all too much of the extra spending in the spendthrift years did not go to buy more teachers, nurses and doctors. It went on management consultants, spin doctors, administrators, pensions, pay awards, reorganisations and new quangos. It also went on keeping a large number of people out of work on benefit, whilst inviting in a lot of people from elsewhere to carry out the jobs existing residents were reluctant to do or did not have the skill to do. The public does not think in terms of medium term spending plans and guaranteed rates of growth in spending. They want better public services and lower taxes, and now know that the waste and unnecessary expenditure is so large that is possible.

The UK economy performs best when public spending grows more slowly than the economy as a whole. This method also gives the best long term rate of public spending growth, as it achieves better overall levels of growth. In the 1970s Labour tested to destruction the idea that the government could improve things by boosting public spending well above the growth rate generally. A trip to the IMF for a bail out, followed by a winter of discontent when the many public sector workers turned on the Trade Union government left us very weakened.

The first year and a half of Margaret Thatcher saw the spending growth continue, mainly owing to large public sector pay awards. The inherited inflation persisted, the private sector was squeezed, and the Conservatives plunged to third in the opinion polls, with many in the governing party wanting to change Leader. In 1981 the Prime Minister set a new course for public spending, keeping its growth below that of the economy as a whole. She ushered in a decade of good expansion with low inflation. Only the establishment’s stupid wish to join the Exchange rate Mechanism brought this to an end, when all three political parties united to get it comprehensively wrong. The ERM destroyed the growth path by forcing boom and bust money management on the authorities. When the pound was strong they were forced to print pounds to try to get its value down.When that caused an inflation they were forced to throttle the economy and to destroy pounds to try to get its value back up! The establishment was deaf to the few of us who pointed this out before we had to live through it.

After the ERM Conservative Chancellors again ushered in an era of low inflation and good growth by controlling public spending growth. Gordon Brown wisely took over these Conservative spending plans, and had a successful first three years on the back of them (apart from the tax grab on pension funds and his partial destruction of the Bank of England). Between them Lamont, Clarke and Brown Mark One built a strong position, with debt repayments and lower spending growth. It meant it took Brown five years to undo it all once he unleashed the forces of indiscriminate spending.

At the same time as he wasted too much public money, he started to reap the bitter harvest from his reforms of the Bank of England. They decided to follow boom/bust monetary growth as if we were still in the ERM. So we enjoyed a period of false prosperity based on too much credit, and are now experiencing a very nasty credit crunch.

The economic history of the last 30 years shows us that the main requirement from government to create the conditions for prosperity is to set a target for public spending growth lower than the forecast for economic growth overall, and to keep to it. I don’t mind how they sort out the politics of tax and spend to do so, but the need for such a change of policy is clear. Brown and Darling have said they are going to do that, but with falling growth and overspending, they are still a country mile away from achieving it.

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12 Comments

  1. Iain
    Posted July 15, 2008 at 10:05 am | Permalink

    "Only the establishment’s stupid wish to join the Exchange rate Mechanism brought this to an end, when all three political parties united to get it comprehensively wrong. The ERM destroyed …"

    I fully agree, and what irritates me no end is to see John Major come onto the TV boasting that it was the ERM which set us on the growth path, forgetting to mention that it was only when we were kicked out of the ERM that our economy began its recovery, something he fought tooth and nail to avoid, which of course the EUpile BBC doesn’t care to question him on, preferring instead to present him as some sort of wise sage.

    I also agree with you about the BBC's line, where they claim all Government spending is absolutely necessary, and if you dare to cut just a few pounds from it the result will be to cancel all heart operations. I am just sorry the Conservative high command aren't rubbishing it, and don't come to these interviews with arm full of examples of Government waste. Only yesterday we had the Treasury select committee say that billions were being stolen from Brown's tax credit system, if Cameron pointed this out it would very quickly shut the BBC up, after all obscene waste is something they should know a lot about at the BBC.

  2. Stewart Knight
    Posted July 15, 2008 at 10:49 am | Permalink

    At last, commentary on the BBC's bias. Of course you are right that today the electorate is more sophisticated and better informed, and that is the root of Labours problem.

    The economy is a subject most people only vaguely understand, but that understanding is now growing and allied to a general feeling that common sense in public spending has deserted Labour, if it ever had it, is the key to Tory fortunes.

    Why will Cameron not gain his million plus votes in the whole of the UK by scrapping the BBC licence tax? An announcement that within five years the licence tax would be scrapped and BBC forced to earn its crust would see great swathes of the public swing behind the Tories. We are now in the digital age and most people could not care less about the BBC.

  3. Posted July 15, 2008 at 11:02 am | Permalink

    All very true, but it does worry me slightly that the Conservatives will hack many people's jobs to pieces if they eventually (and rightly) go after the bloated public sector and start trimming.
    http://lettersfromatory.wordpress.com

    Reply: No need to do that – just stop replacing and recrutiing and the numbers across the public sector will drop off quite quickly

  4. Dr Dan H.
    Posted July 15, 2008 at 12:44 pm | Permalink

    Sir, I think you're over-estimating public intelligence here. The electorate these days has had so much New Labour garbage thrown at it over the years that it believes a lot of it.

    You need to reverse this trend, and quickly.

    Start asking difficult questions repeatedly of Government ministers on the lines of "Why, if we're so tight for cash did we give 825million pounds to India over the next 3 years; India, a country so rich it has nuclear weapons and a space programme?"

    When the usual self-serving guff about developmental aid comes up, bounce back with an example of how many hospitals (or whatever) this package could have bought us. Finish up by asking if Gordon is working for the UK or for India.

    Slightly more dangerously, have a crack at Gordon on membership of the EU. The electorate of pretty much all EU countries is overwhelmingly euroskeptic (if you don't believe me, go talk to your own constituents…) and the UK is more euroskeptic than most EU countries. Basically, we're being ripped off by an unaccountable body which Labour are seemingly determined to support for no logical reason we can see, other than the EU being a lovely rich sinecure for failed UK politicians (Kinnock, Mandelson and their ilk).

    It might actually be a good idea to have a really good talk about the EU before you have to fight an election. The electorate you serve is euroskeptic and given a referendum on EU membership, would likely vote to get the UK out of full EU membership and into associate membership of some kind. Now, you serve the electorate so let's hear some good financial reasons for being members of an organisation so corrupt that its own tame accountancy body has not signed off the accounts for over a decade.

    Of course, the Tories will win the next election here. However, instead of a win a firm promise of a referendum on EU membership would firstly get you a landslide victory, and secondly would put to bed the membership issue once and for all.

  5. Posted July 15, 2008 at 1:43 pm | Permalink

    If the Tories don't want Labour/BBC to say any cuts would fall on nurses etc they must say which sacred cows should be served up. Choose a number of the most pointless quangos & not to replace half of all public employees, with a short list of exceptions including doctors & nurses, when they retire. The particular quangos would scream but most of the others would wisely keep their heads down. Equally the LibDem proposal last time to abolish the DTI root & branch should be adopted.

    Machiavilli said that if you are going to disposess people better to do it quickly & thoroughly to a small number than to have the majority bear a lesser burden. This may not be entirely fair but it works.

  6. Acorn
    Posted July 15, 2008 at 1:47 pm | Permalink

    I am starting to miss my shot of Redwood in the morning when I am away. My trip to the Le Mans Classic event only being marred by a Brit, whose alcohol fuelled leap from deck to deck on the ferry, ended with him in a body bag aboard HMS Lancaster.

    Those who were there will know that it would be impossible to stage that race in the UK; health and safety would never allow it. The French are highly taxed, as we are, but you can see where the money has been spent on the national infrastructure.

    Your comments are spot on as usual. I have been trying to fathom where the pay-off to the trade unions is in the new Employment Bill. There has to be a trick in there somewhere to launder taxpayer’s money into the unions and on to the Labour Party coffers. But; I hear this morning that there are £115 billion of government contracts on offer which have a trade union membership requirement attached to the contract specification. That must be how they are going to rip us off. Keep an eye on this for us John.

    I see that Redwood; DD and IDS are now the “big three” outside the Cameron tent! I suspect there are a few more that will join you; but, don’t let them kick out the tent pegs. There is only parking for one tent for now.

    As others have said, the BBC is the elephant in the room in today’s media. It has to be cut back to something that fulfils a basic public sector mandate. With £2.7 billion from the television tax and £1.1 billion from programme sales, it is smothering the private sector. Some may have noticed that its foreign services – World News television for instance – are not that good.

    One thing is certain, by 2010; the UK will be a busted flush. You are going to have a hell of a job getting the nations finances back on track. As far as I can tell, this government will spend over £600 billion of our £1400 billion market price GDP this year. The “off balance sheet” stuff is probably adding £70 billion to the “socialised economy” bill. Keep telling the voters, every chance you get, why they are not as well off as they should be by now.

  7. James
    Posted July 15, 2008 at 4:08 pm | Permalink

    Well said Stewart about the BBC.
    One of the presenters on our local BBC Radio was openly stating that he and his program were right behind Obama and would never vote for McCain. Tell them we are right behind them and what can we do to help them (the Democrats).
    It was like a party political broadcast.
    So much for the BBC's impartiality.

  8. Jack Holland
    Posted July 15, 2008 at 4:42 pm | Permalink

    It's happened before – see Correlli Barnett's "The Verdict of Peace".

  9. mikestallard
    Posted July 15, 2008 at 5:45 pm | Permalink

    From the sublime to the ridiculous: public extravagance goes really deep still.
    I am currently teaching French children here in Wisbech. One of my colleagues (a good teacher too) is going for a job today as "Youth and Community Officer". I said that that sounded exciting. Yes, it is. The job is to coordinate the Youth Council with the local Schools.
    I asked what the local Youth Council was. She didn't really seem to know. I certainly have never heard of it and it has not been in the
    paper either. Maybe it is planned for later.
    The local schools have been all taken into one huge Comprehensive where nobody from outside, let alone an unnecessary civil servant, is welcomed (I wonder why) and where you need all sorts of CRB checks and so on to approach. How she plans to get into that place I have no idea at all. And, once in, what will she do then?
    But I bet that someone is appointed to this very expensive non full time job nevertheless.

  10. Matthew Reynolds
    Posted July 15, 2008 at 9:41 pm | Permalink

    Real terms public expenditure growth should be halved to 1% p/a for as long as it takes to wipe out the PSBR . Jobseekers Allowance & Incapacity Benefit need replacing by one single payment designed to slash economic inactivity – this would offset any addition to the dole queues caused by clearing out some of the £100 billion p/a QUANGO’s . Plus smaller government would as the Irish experience proved lead to an economic rebound .

    Longer term raising the basic personal allowance to £14,000 p/a so that means tested welfare created dependency can be ended by abandoning the insane system of taking money off of the poor via tax and then handing it back in complex handouts is the right goal . You could slash poverty rates & the number of penpushers needed to manage such a complex scheme that causes vast amounts of hardship & distress and has high admin overheads and a low level of success . When a person on a low or modest income earns more we should reward their success with a bigger personal allowance – not clawing the cash back via poverty creating credits .

    Do the over-paid Guardian readers running the BBC really care about the poor or do they just regard them as fodder to bribe with welfare dependency so that they vote Labour ?

    Selling off the BBC to fund a once off tax refund to give our faltering economy a boost sounds more sensible than a Poll Tax to finance an out of date white elephant of dubious value in the modern world . I mainly watch Sky or DVD – why should I or anyother such person fund liberal left propaganda when we prudently decide to give such rubbish the elbow ? All basic rate payers could get £240 p/a as selling off the BBC would raise about enough to fund a rebate worth twice the Brown-Darling Bribe .

    In the longer term we need the top rate of tax to fall by 25% from 40p to 30p and a top rate threshold of about £60,000 p/a (linked to earnings or prices whichever is greater ) just to encourage enterprise at a time of cut throat global tax competition when jobs & business flee Labour’s anti- enterprise regime and our long term prospects suffer . The basic personal allowance should be £14,000 p/a for all taxpayers ( linked to prices or earnings whichever rises by more ) . A short term stimulus and longer term plans to reduce the size of the state and bring down income taxes would prove that the Tories are a modern Party capable of learning from abroad about how to improve the UK’s economic prospects by applying timeless Conservative principles to a modern age .

    The Bush tax refunds have worked in the US and smaller government and lower taxes have worked a treat in Eastern Europe . If coupled with a 14p a litre fuel duty cut paid for from the extra tax revenue from the North Sea Oil taxes caused by higher prices family budgets would be less strained . Would Panorama like to investigate that ?

  11. William B.
    Posted July 16, 2008 at 3:20 am | Permalink

    There we have it, Mr Redwood, I said we would agree again today.

    Mr Brown and Mr Darling can say they will cut public spending in real terms until they are blue in the face, but there are two major hurdles for them.

    First, it goes against the ingrained belief in the benefit of big government which is the very basis of their politics.

    Secondly, the union leaders will not allow it. After many years in the relative wilderness there is at last an opportunity for a new generation of union barons to emerge with real power. The Labour Party needs their money and there is still no such thing as a free lunch.

    As Mr Craig has commented above, and you have said yourself, a freeze on non-essential public sector recruitment is a simple course which would be a start, but how would it work in practice if Mr Brown tried to do it? How long would it be before the unions object to their members being required to transfer jobs to fill vacancies? How long then before Mr Brown
    has to agree to new recruitment to keep his party from bankruptcy?

    Better that they do not try because then an incoming replacement government would have a freer hand.

  12. Stewart Knight
    Posted July 16, 2008 at 10:16 am | Permalink

    Let Brown make his dodgy deals with the unions, in fact, the more the merrier; it gives Cameron loads of ammunition to curb the unions as they wield power and also to curb their financial support of Labour too…all wholly justified to a willing and listening public.

    Today's strikes is the start of the unions flexing their new found power and influence, and long may it last, well…until 2010 anyway. Lots of strikes in the lead up to the next election damages Labour as much as the unions.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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