Delivered at the Institute of Economic Affairs
The pre-budget period is generally typified today by a cacophony of competing measures from think tanks, interest groups, the media and competing politicians ranging from the incisive to the interesting to the plain idiotic.
This focus on individual budgetary measures can cause us to lose sight of more fundamental underlying themes and narratives.
So, today I want to talk about the “Why” in the economic debate not simply the “How”. Our policies should be about the type of behaviour we want to encourage and the type of country we want to be not just how much money Government can raise. Our economic policies must be about what we believe in and must reflect our values.
Economic policy is not just about pounds, shillings and pence. It is the compass from which all other policy areas find their direction.
I want to talk about an economic narrative underpinning our policy approach that would send the clearest message that the Conservative’s core values of hard work, building for a better future and celebrating success are still at the centre of everything we try to do. That we understand those who work hard with the dream of a home of their own; those who save hard so that they can look forward to a comfortable and rewarding retirement; those who invest so that our small businesses can grow; and those who sacrifice today so that their children and grandchildren can chase horizons more distant than their own.
But we need to equally encompass the concepts of aspiration and opportunity. We talk a lot about aspiration, but aspiration without opportunity is a route to frustration and resentment. It is a barren path in the field of human endeavours.
So we need to set out how we will provide greater opportunity to those who want to take advantage of it and show how it will improve the lot, not only of individuals - but of families, communities and our country as a whole.
We need to talk about the creation of wealth, not just measuring growth, and explain how, by ending the principle of universal benefits in the welfare system, we can reduce the overall costs and cut taxes without diminishing the security on which some of the most vulnerable in our society depend.
History & Politics
But, let me begin with our inheritance as a government.
We are all familiar with the issue and history of debt. In 1997 Labour inherited a balanced budget on coming to office – indeed, it was a budget that was set to move into surplus. What happened? Labour went on a massive spending spree raising public spending from £309 billion in 1997 to £647 billion in 2010. That is an increase from 40% to 52% of GDP and represented the fastest growth in public spending in Europe and it was not just the product of the banking crisis.
To make matters worse, the panic spending that Gordon Brown embarked upon in order to try to avoid his impending defeat, set a trajectory for spending that would see debts continue to mount at an alarming rate.
Even with the coalition Government’s deficit reduction plans - which the current Labour leader has attended Trade Union rallies to protest against - the national debt will reach £1.4 trillion in 2015.
History will judge Gordon Brown and his disciples harshly. They spent with abandon, rolling out the Socialist vision of a big state. But much worse; rather than diminishing the reliance that individuals have on the state, they purposely pushed the drug of welfare addiction to more and more people, ensnaring even the affluent middle classes.
Today, we see the full destructive consequences of that behaviour with ordinary families paying too much tax so that it can be given back to them in benefits and credits, to no one’s advantage other than the army of bureaucrats needed to administer it. It is debilitating for society, demeaning for individuals and expensive for the taxpayer.
The expansion of welfare addiction is one of the most corrosive effects of socialism and it must not only be neutralised, but reversed.
The public understand what we are saying - that we cannot continue to live beyond our means and spend money that we do not have.
Now we need to go further and create our own political rules - Conservative rules - which will change the terms of trade in the economic debate and show Labour for the unreconstructed, big government, big spending, big taxing party that they are.
As Margaret Thatcher so memorably put it – the one thing you can count on with a Labour government is that sooner or later they run out of other people’s money. The trouble is, they have usually done a political bunk before the bills have to be paid, just as they have this time
So where are we now?
The progress of the Conservative-led coalition has been encouraging. A quarter of the deficit has gone; over a million private sector jobs have been created and we’re delivering reform to the education and welfare systems that will make this country more competitive in the future.
The Chancellor announced in his autumn statement in 2012 a switch from current spending to £5.5bn of capital investment in science, roads and education, announcing a cut in corporation tax to 21 per cent by 2014 and a temporary, tenfold increase in the Annual Investment Allowance to £250,000. But we are in a coalition where our Lib Dem partners seem resistant to seeing the welfare budget cut further and where too few subscribe to the necessary supply side reforms that we must make if we are to inspire meaningful growth.
At the end of this financial year, our public sector net debt will be around £1,200 billion and we will be paying over £47 billion in interest payments alone. That makes our debt interest the fourth biggest recipient of public money in Whitehall. Only Welfare, the NHS and Education (just) receive more.
It is more than our Defence, Foreign Office and International Aid budgets combined and is more than twice the combined budget of the Home Office and Ministry of Justice. More menacingly, our interest payments are forecast to rise further so that in 2015/16 we’ll be spending more on servicing our debt than we are on educating this country’s next generation.
That is why the Prime Minister was right to point out that there is no alternative to controlling spending, reducing our deficit and, ultimately, our debt, if we are to avoid debt interest payments from becoming debilitating.
And let’s be frank – we don’t have this debt mountain because we tax too little but because we have spent – and continue to spend – too much. What we thought was prosperity turned out to be a debt-fuelled illusion.
Despite our reforms, the welfare budget is still forecast to grow by £5 billion over the next two years. And despite an official public sector pay freeze, public sector wages have still gone up by 2% in the last year.
It is unacceptable that wages in the public sector should be rising twice as fast as in the private sector and spending departments need to ensure that tools such as grade inflation- where individuals get more money by being promoted to a higher grade- are not being used to undermine the pay freeze.
I’d like, therefore, to look now at the need for extended downward pressure on public expenditure.
The first rule is that we should not spend money we don’t have and that we should not live beyond our means today only to pass our debts to future generations.
We all know that we live in a competitive global economy but how many people are aware that the global economy has grown by 55% in real terms from $32.2 trillion in 2000 to $69.7 trillion in 2012?
The problem is that we are not sharing in this growth because we are over taxed, over regulated and we spend and borrow too much. I believe that we should aim to freeze public spending for at least three years and probably more. Such a move would in three years, would see spending totals £70.4 bn lower and this would not just fund the tax-cuts many would like to see but take chunks out of our deficit too. If we were to go further still and freeze public spending for five years at 2012/13 levels, annual spending would be £91.2bn lower in 2017/18 and the cumulative saving over 5 years would be an incredible £345 billion.
As a Conservative, such a commitment doesn’t scare me. I believe that the country will be at its best when the Government is small and people are left to enjoy the fruits of their own labour. I believe that in leaving money in people’s pockets, economic activity will follow. People will buy houses, invest for their future or just go shopping. Whichever is the case, it is creating a society that is sustainable for the future in a way that our current – welfare dependent and debt ridden – economy is not.
Controlling the total spending envelope will still allow governments to decide their own priorities and, as the economy grows, we should be splitting the proceeds of growth between deficit reduction and growth-inducing tax cuts, thereby establishing a future basis for expenditure that is solid and sustainable.
We must also ask whether ring-fencing departmental budgets makes sense in a period of prolonged austerity and let’s be clear, that is what we are in because this is no short, cyclical correction but a longer term structural correction made necessary by both global economic forces and our own history of massive overspending.
The next area to tackle is the wilful extension of ‘welfare-ism’ into the lives of millions of British people where it has no place. We need to begin a systematic dismantling of universal benefits and turning them into tax cuts.
Let me give you some examples of how I think we might remove benefits but then also offer tax cuts that encourage the sort of behaviour that will make our economy more sustainable.
Firstly, we could scrap the taxation of income gained through cash savings in the bank. This represents barely £2.7bn, or 0.5% of tax revenues. Such a move would directly benefit pensioners with savings, therefore paving the way for the means testing of the winter fuel allowance and other benefits enjoyed by pensioners who have personal wealth that should leave them well clear of the safety net of the welfare state. The saving set against the loss in tax revenue would make that a broadly cost neutral measure but it would ensure that pensioners who have made provision for themselves and who have felt the downside of low interest rates are protected.
Secondly, we could look at limiting access to housing benefit for the Under 25s. Total abolition could save £1.8 billion a year by 2015/16 but I think that an unworkable policy as it is simply a fact of life that some young people will need to be housed – for example-as they leave foster care or try to escape a troubled existence in the parental home. However, I believe that there is scope to be more discerning and that we could make it the exception that people under 25 qualify for housing benefit rather than the rule.
I would balance such a move against a Stamp Duty discount for home buyers under 30 so that the incredible cost of buying a house is reduced for those in the earlier part of their career. Making no Stamp Duty payable for young people on properties up to the £250,000 threshold would encourage young people to save during their twenties for the deposit on a property and encourage home ownership. Stamp Duty on property as a whole raises around £6 billion per annum but the amount of that raised through young first time buyers purchasing properties of under £250,000 will be significantly less. In order to make this work, we would need to ensure that the rules for eligibility for housing benefits made savings that outweigh the cost of the Stamp Duty discount.
Of course, the whole arena of tax and benefits is a complex one and we have to ensure that we are able to provide for the most needy whilst not penalising those who make provision for themselves in the longer term.
I believe that any benefit that is given by the state needs to fulfil two basic tests. The first is what I would call the rainy day test, and the second I would call the Cascade test. Put simply, we need to encourage the principle that when people are able to do so, they should put something away to guarantee their future security. But people will be loath to do this unless sufficient proportion of what they put aside can be passed on to the next generation.
Otherwise those who genuinely make provision for themselves and their families will be penalised while those who set nothing aside will be given full support by the state, subsidised by the taxes of more responsible citizens.
Difficult though it is, balancing changes to the welfare system against tax cuts and tax relief has three enormous benefits.
First – and most importantly – it leaves money in people’s pockets rather than siphoning it off for the Treasury.
The second is a massive reduction in the number of people currently employed to take your money from you in tax and hand it back to you in the form of some benefit or another. It is costly and bureaucratic; involves too much time; too many forms and too many pointless regulations.
Finally, it changes the terms of trade in the political debate. Instead of being challenged by Labour over which programme we would spend more on or which benefit we would support; we would be challenging them to tell us which tax cut they would reverse. We’d be defying them to cut the budget that matters most - the domestic budget of hard working families up and down the length of Britain.
But where will growth come from?
When we have put more money into the pockets of individual consumers - as we have done through raising thresholds and cutting tax for 25 million people – their main response has been to pay off their household and credit card debts. That is something that is right for both individuals and families themselves, and the country as a whole, but it doesn’t lend itself to a consumer led recovery.
And we know that growth cannot come from government spending as the government is already overspent and in any case, even if it were possible, higher public spending would only crowd out the private sector and stifle the wealth creating part of our economy so vital for long-term jobs and prosperity.
But we could certainly do more to attract inward investment. As I have already said, the global economy has grown rapidly in recent years and, although we have had our successes we need to continue to make Britain an attractive destination for the global funds seeking a safe and attractive home. We have some natural advantages in our location, language, time zone, legal system and culture but we also have some self-imposed limitations. Money will go to where money can be made and to where money can be easily moved. That is why I believe that Capital Gains Tax provides such a problem for us.
The rise in CGT in 2007 led revenues to fall from £5.3 billion in 2007/08 to £2.5 billion in 2009/10. The economic downturn will have been a factor but analysts seem unanimous in the view that an increase in any tax on capital gains will act as a disincentive to investors realising their assets.
If we are to create growth; we need to generate economic activity not stifle it. The tax structure that is appropriate for trying to cool down an overheating economy is not the same structure that we require in an economy that is relatively flat.
I would like to see capital gains reduced, if possible to zero, for a defined period- 3 to 5 years- before being reintroduced at a more sensible level. This would create a tax window where businesses that are sitting on assets might be encouraged to sell, investment in capital becomes more attractive and where hundreds of thousands of second homes might come on to the market.
The impact on our economy is obvious. There might be a fall in revenues for the Exchequer to begin with but that would be balanced against jobs created and increased business.
Let me take one of those examples. According to the latest census some 2.6 million people in Britain own a second home. Supposing for the sake of argument, one third, would like to get rid of their properties but are currently refusing to sell because they stand to lose 28% of their capital gain to the Treasury. In a zero capital gains window, this could result in three quarters of a million properties coming onto the market with effects on Stamp Duty, retail sales, the employment of craftsmen and an effect on the building industry.
Critics might say that these transactions would occur in any case, over time, but we need these activities now to help generate growth at a difficult time for our economy.
In the longer term, I accept that CGT has a role to play in minimising tax avoidance amongst the most wealthy so I stop short of recommending a permanent abolition. My preference is to reintroduce taper relief for longer hold periods. If this were restricted to business assets, we could foster a new culture of long-term, patient capital, which is exactly what our economy needs to build the next generation of sustainable companies.
My final point also relates to the creation of a savings investment culture and the iniquity of the state taxing the same income on multiple occasions. We pay tax on income. If we then behave responsibly and save our money, we are taxed on that too. If we invest it in business or property, then we may be hit by Stamp Duty or Capital Gains Tax if we attempt to move our own assets. Finally, if we have the audacity to die, having tried to provide for ourselves and future generations, then the state taxes again.
Am I the only person in this room who finds this deeply immoral? It should be a matter of principle, certainly for Conservatives and, I would argue, all others who wish to see the encouragement of thrift, self-reliance and the principle of equity; that we should gradually move towards the reduction - or even abolition - of the taxes where the state hits the same money on multiple occasions and discourages the very behaviour that would lead to a more responsible society.
And this I believe is the crux of the issue. Taxation policy needs to be judged not only by the ringing of the cash registers at the Treasury, but the type of behaviour it engenders in the population.
The economic policy we set out in the Budget – and in particular the way we tax people – is the compass from which all other Conservative policies find their direction. We have been left the legacy of public spending that is out of control and a punitive and complicated tax system that is too easily avoided and discourages the people of this country from building wealth and investing for the future.
It is the legacy of one of the most cynical economic policies ever deployed. Where Thatcher empowered through the sale of council houses or the offer of share ownership; Brown subjugated through the most scandalous expansion of the welfare state, over complicating tax and benefits until they have become an almost impenetrable labyrinth of forms and rules.
How did we ever get to a situation where those earning £60,000 were receiving state benefits, where your household income could be bigger on welfare than the working family next door or where those on low pay subsidised cold weather payments for pensioners living on the Costa del Sol.
We have a civic duty to help those who cannot help themselves or need support and security in difficult times, but the welfare state should not be about taxing hard working people who may be finding it hard to make ends meet and then using armies of bureaucrats (who all cost money) to give them their money back or, worse still, redistribute it to those who already have much more than them.
The last Labour government were using a compass that was taking them in completely the wrong direction – promoting dependency and entitlement, and creating a bloated welfare state that has ruined this country’s finances for a generation.
The language of our economic debate has become skewed towards a socialist view of the world – tax cuts are labelled as ‘cash handouts’ from the Government when they are really just letting you keep your own money; cuts to allowances or benefit entitlements are labelled as ‘taxes’ and yet they take nothing that you already have. The underlying premise is that all money is ‘public money’ when actually, there is no such thing. There is only taxpayers’ money and Government should keep its greedy hands off it.
It is time that we set a clear philosophical course and re-build an economy that is leaner, more agile and better prepared to compete in the modern world.
Less welfare for those already with a decent income but tax cuts so they keep more of their money in the first place.
A pause on taxing capital gains so that the UK can hoist a sign saying “Open For Business” to those in the world with money to invest.
The phasing out of the taxes that hit the same income again and again.
And as the economy grows further, let’s share the proceeds of that growth between deficit, and eventually debt, reduction and tax cuts that allow the people to share in the spoils of our success.
The great socialist coup of the last decade was making wealth an embarrassment. It is not. It is the prize for aspiration and hard-work and its side effects are higher tax revenues, more jobs and more investment.
We must, again, encourage people to dream of a better life for themselves and for their children.
We must encourage them to believe that their future lies in their own hands and not in the hands of a bloated State. We must empower people to achieve the dream of home ownership and we must stop taxing the proceeds of their savings and investments so that they can build a prosperous future for themselves.
Where they aspire let us bring them opportunity and they will build a better tomorrow for Britain.