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Finance

The Tories need to abandon their shibboleths


The Conservatives have been in power since May 2010. Their record has been dreadful. This is partly because of adverse circumstances. But it is also because the party is in thrall to an outmoded ideology. On balance, each leader has also been worse than his or her predecessor.

Maybe Rishi Sunak will be the “grown up” who breaks this sequence. But it is not grown up to promise tight controls on public spending, but only after the next election. It is not grown up to lower debt by slashing public investment. It is not grown up to raise taxes through stealth reductions in thresholds. Grown ups should not promise cuts in the distant future. They should focus on the overall balance sheet, not just liabilities and they should be honest.

After the damage done by the fiscal austerity loaded on the most vulnerable by George Osborne, the ill-considered Brexit referendum of David Cameron, the botched negotiations of Theresa May, the lies of Boris Johnson and the folly of Liz Truss and Kwasi Kwarteng, Sunak must offer something vastly better. The lengthy period of negligible productivity growth and stagnant real disposable incomes makes this even more urgent. It does not begin to be good enough for Sunak to impose another round of cheeseparing austerity, especially since that would tend to hurt the more vulnerable at a time of soaring prices.

Bar chart of Tax as a % of GDP , 2020 showing The UK has a low  tax burden relative to many  of its peers

The party needs to learn from its failures. If it does not wish to do this in opposition, it must do so now, while in government. Tim Pitt has provided an excellent outline of what the Tories need to learn (and also to forget) in a recent pamphlet for Onward. In particular, he stresses that the Conservatives have been successful for so long because they have not had an unchanging ideology. On the contrary, he suggests, they have had four overlapping principles: pragmatism, stewardship, “One Nation”, and “empowerment”. The crucial point is that the capability of the state and the cohesion of society should always matter to Conservatives. Today is entirely different from 1979. Thatcherism is a “zombie” idea.

Nowhere is this truer than in considering the future role and size of the state. The simple and obvious truth is that it is likely to grow faster than the economy. That is also quite feasible, provided the economy also grows. But if the state is likely to grow, so must the tax burden.

Bar chart of Share of total tax, 2020 (%) showing Social insurance is a relatively small proportion of UK revenue

Why will the state tend to grow faster than the economy? First, the economy needs a well-educated and healthy labour force. Second, the services supplied by the state are ones in which it is hard to raise productivity, which tends to make them increasingly expensive. Third, spending on transfers and health will rise with the proportion of the population that is old and infirm. Finally, higher spending on transfers and essential services is also what voters demand.

Taxes will have to rise as a share of GDP. The only alternative is for the state to abandon important obligations or for it to pretend to promise what people expect, while delivering a worsening standard. Fortunately, a higher tax burden is not an insuperable problem, because the level is relatively low by the standards of its European peers. Moreover, many of these more highly taxed countries are substantially richer than the UK. Conference Board data show that the purchasing power of Denmark’s GDP per head was 32 per cent higher, that of the Netherlands 29 per cent higher and that of Germany 22 per cent higher than the UK’s in 2021.

A big question is how to raise more revenue. Interestingly, the big difference seems to be on charges for social insurance, which are relatively low in the UK. In reality, these are just another form of tax on incomes. But such hypothecation might work better politically. Other taxes could also be raised: taxes on land, including of gains on development, on wealth, on gifts and on emissions of greenhouse gases.

Some will argue that any of this will kill growth. If so, why are many more heavily taxed countries so much richer? One needs a deeper understanding of the determinants of savings, investment and innovation. Taxes do matter. But they are not the only thing that matters. It would be possible to raise revenue while improving overall economic dynamism.

As Pitt notes, productivity has risen at just an annual rate of 0.4 per cent a year since the financial crisis. The Tories have been in power almost throughout. The economy has also stayed largely the one Thatcher bequeathed, with a relatively modest tax burden. This is really poor. The Tories must learn from failure. How is the country to combine the state it desires with the dynamic economy it needs? That is the question Sunak needs to answer. So, for that matter, must Keir Starmer. It is at the heart of UK politics.

martin.wolf@ft.com

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