Sunday, 16 March 2008

A Taxing Problem for Cameron

After the overnight polls showing the Conservatives 9-16% ahead, it was strange to see a highly-cautious headline in the Sunday Telegraph with Philip Hammond, Shadow Chief Secretary to the Treasury, claiming that tax cuts might not be possible until a SECOND Cameron administration.

This extraordinary admission represents a huge attempt to damp down expectations, raised by the media and some on the Tory Right, that an incoming Conservative Government would quickly start cutting both public spending and taxes. Today's news has also drawn anger from pro-Tory columnists such as Iain Martin.

Now I have some sympathy for Hammond and David Cameron, I suspect they know that the state of the public finances is and will be far worse than most believe to be the case. Public sector debt is running out of control and any incoming Government will be severely constrained but a ccommitment to match Labour spending levels not only further constrains George Osborne but also seems surprisingly timid.

Let's rewind a little....

In 1992, John Major secured a fourth term for the Conservatives primarily because people believed that an incoming Labour Government would fund its massive spending commitments through tax rises (remember the £1,000 "double whammy" posters). The mood then was insecure - the recession was still in full flow and people were terrified at the prospect of losing more money. They voted with their wallets and Major romped home.

By 1997, the messages and the mood were very different. With the economy recovering and people more financially secure, there was a widespread perception that money now needed to be spent on public services and infrastructure. Tony Blair read the mood perfectly and his commitment not to raise income tax was probably unnecessary. People were ready to see money spent on public services and would, I think, have accepted a small tax increase if required.

In 2008, the mood music has changed again. The dark clouds of recession seem to be gathering, aided of course by the doom-mongers in the media. People are financially insecure and the perception is that public services are bloated and inefficent. Polls have shown clear support for spending cuts and tax cuts so I don't know why the Conservatives are being so timid.

In 1979, the incoming Conservative Government found the public finances in a disastrous state but moved ahead with a radical financial overhaul cuminating in the 1981 Budget with its huge switch to indirect taxation. Margaret Thatcher recognised the need to be radical in spite of the financial constraints but David Cameron seems to lack that radical edge.

This leaves the Liberal Democrat plan for a cut in basic rate tax from 20p to 16p as the most radical game in town. IF Vince Cable and his team can come up with some well-argued and costed spending plans that recognise the need to rein in some areas of Government excess, the Liberal Democrats may yet steal an advantage in a key area.

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