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14 July 2022

Why no Tory leadership candidate can tell the truth about the economy

The policy that would do the most to boost growth is a sensible trading relationship with the EU.

By David Gauke

Leadership elections rarely show political parties at their best and the current contest to elect a leader of the Conservative Party is no exception.

It is generally unrealistic to expect candidates to speak to the country rather than the party. Nor are candidates well placed in terms of time or resources to set out detailed policy proposals. The exception in this contest has been tax policy. For anyone with a passing knowledge of the state of the public finances and a belief in fiscal responsibility, it is a generally unwelcome exception.

The list of tax cuts that have been offered is a long one, as is the list of former ministers, economists and commentators who have questioned the credibility of these proposals. Substantial tax cuts are likely to increase inflationary pressures (probably modestly but still unhelpful), weaken the sustainability of the public finances and damage market confidence (the poor performance of the pound suggests that all is not well in how the UK is perceived). It is fundamentally unserious.

One can see why this has happened. Taxes are heading towards their highest level since 1949 at a time when there is a cost-of-living crisis, while the person who raised them was the early frontrunner in the leadership election. Focusing on tax targets Rishi Sunak’s greatest vulnerability.

There is little recognition of why taxes have gone up or, to put it more precisely, why spending has gone up, will probably continue to do so and needs to be paid for. There was a long period when spending was tightly constrained after the 2008 financial crisis. The rights or wrongs of that can be debated but it is undeniably the case that by 2019 the public wanted higher spending and Boris Johnson’s 2019 general election campaign reflected that in its promises of more police and more hospitals. 

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The government also has ambitions that are likely to be expensive – levelling up and net zero. Covid imposed additional debt and, therefore, debt interest payments could become much more substantial. There is also a need to address the various backlogs caused for public services by the pandemic. We face a bigger defence threat than has been the case for many years and our population is getting older and in greater need of health and social care, as the Office for Budget Responsibility (OBR) has pointed out. Suggesting that these costs are going to have to be paid for does not make Sunak a socialist, as Jacob Rees-Mogg allegedly called him.

This leadership campaign is exposing the difficulty the government has in articulating a coherent economic policy after a period when – under Johnson – coherence was not at a premium. Conservatives could argue for fiscal responsibility but, unless taxes remain high, that means spending cuts that the public (especially those new, Red Wall voters) would oppose. Alternatively, they could make the Reaganite argument that low taxes automatically bring growth but risk losing the trust of those who are instinctively more cautious about the public finances.

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These debates are not new. In the mid-2000s the economic divide in the Conservative Party was between the fiscal conservatives – led by David Cameron and George Osborne – and the “supply-siders”, such as David Davis. The fiscal conservatives won that battle in part because it was plausible to argue, before the global financial crisis, that tax cuts could be achieved by “sharing the proceeds of growth”. After the crash it was clear to most Conservatives that the priority was restoring the public finances.

The debate has moved on. With spending pressures greater than 15 years ago and growth forecast to be poor, some will question if there is any prospect of fiscal conservatives being able to implement tax cuts. It is a fair question, but does not justify ignoring reality and, to use Sunak’s phrase, telling ourselves “fairy tales” about being able to cut taxes regardless.

A better, more productive debate would focus on how we create higher growth, which would help us address the problems in the public finances. Tax reform that involves raising revenue in a less damaging way (which, I would argue, would involve a lower rate of corporation tax paid for by raising revenue elsewhere), finding ways to build more homes where people want to live, encouraging talented people to come to the UK, expanding educational opportunities and strengthening our science base all have a role to play.  

There are, however, two problems for aspirant Tory leaders in defining themselves as relentlessly pro-growth. First, even some of these policies play badly with Conservative MPs and members. Second, there is a further policy agenda which would be of much greater importance but which would be politically suicidal to advocate in the current Conservative Party – a sensible trading relationship with the EU. 

The loss, according to the OBR, of 4 per cent of GDP – £100bn overall and £30bn in terms of tax receipts – caused by a hard Brexit makes the challenge of delivering sustainable public finances that much harder. A Conservative leadership campaign in which none of the candidates – even those who have sought to highlight “tough choices” – have been prepared to acknowledge that is both unsurprising and depressing. Even the supposed economic realists are refusing to face economic reality.

[See also: Conservative Party members are more pragmatic than you think]