How fast have taxes risen?
Gordon Brown has raised taxes by 50% in cash terms and 24% in real terms since taking over the Treasury, according to shadow chancellor Oliver Letwin. That includes 60 “stealth tax increases”, the bulk of them falling on middle-class property-owners. The average family in Britain has seen its tax bill rise £600 this year alone. Although income-tax rates have remained unchanged, other taxes have soared. The average band D council tax bill, for example, has risen 94% since 1994. Similarly, the amount raised from stamp duty and inheritance tax has increased five-fold in the last decade. In 1997, when Labour came to power, the taxman took 34.8% of GDP. By 2007/8, that will be 38%.
What is Labour doing with all this money?
Pouring it into public services. NHS spending, for example, has increased by 37%. But critics say that much of this cash is being squandered on expensive pay deals and huge numbers of bureaucrats and administrators rather than front-line staff. Thus, the number of NHS bureaucrats has risen from 150,000 to 180,000, and the cost of running the Government by £7bn a year. The Tories argue that the public is seeing little return on this spending. NHS treatments, for example, have risen just 5% since Labour took office. Yet the Government shows little sign of wanting to rein in spending. In this June’s Comprehensive Spending Review, Gordon Brown is expected to allow Government spending to continue to grow in line with the economy, while health spending will grow even faster. The result is that by the end of the decade, Government spending is expected to consume 42% of GDP.
So are the Tories promising to slash taxes?
No. Shadow chancellor Oliver Letwin says he would like to cut taxes in the first term of a new Tory government, but he can’t promise. Instead, he is promising to spend even more than Labour on health and education – while cutting overall public spending. Letwin says that the Conservatives will need to spend more on health and education to pay for the introduction of its radical new passport schemes for schools and hospitals. The result is that spending will continue to rise under the Tories, just not as fast. Gordon Brown plans to raise spending in line with economic growth, equivalent to £75bn over the next six years, but Letwin will raise spending by 1% less than the rate of growth (about £40bn). This produces a saving of £35bn by 2010. At the end of 2010, the proportion of GDP consumed by Government will fall to 40% under the Tories.
What will they do with the savings?
In the first place, they will need it to repay Gordon Brown’s sharp increase in borrowing. All indications are that borrowing this year will be above the Government’s forecast of £37bn and that next year will be worse. The Institute of Fiscal Studies estimates that putting the public finances back in order would require an extra £15bn in taxation. Not every commentator agrees that Government borrowing is a problem. After all, the UK’s fiscal position is quite sound compared to most other industrial countries. Labour inherited a national debt of 44% of GDP in 1997, and today it is just 40%, while France is at 48%, the US at 50%, Japan at 70% and Italy at 90%.
How have the proposals gone down?
Badly. Conservative critics complained the proposals were too cautious. Labour denounced them as dangerously radical. To an extent, both are right. Letwin’s plans do not contain the promise of swingeing tax cuts that many Tories had hoped for, and the proposed cut in Government spending from 42% of GDP to 40% hardly sounds ambitious. But even achieving these figures will require what the Daily Mail notes will be “eye-watering” cuts in spending. Letwin plans to increase spending on health and education by 9% annually in the first two years and 5% a year thereafter, while at the same time restoring the link between the state pension and average earnings. To pay for this, spending on all other areas of Government activity, including defence, transport and law and order, will face a cash freeze in the first two years, and thereafter will rise only in line with inflation.
Where will the savings come from?
The Conservatives admit they have yet to work this out. One of the few specific pledges is for a recruitment freeze in the civil service, which Letwin says will reduce Government running costs by £3.4bn by 2010 and cut back 100,000 Whitehall jobs. However, they received welcome ammunition this week in the form of a leaked report from Sir Peter Gershon, head of the efficiency review set up by Labour. Gershon has identified 80,000 civil service jobs that could be cut at a saving of up to £15bn. Many of these savings depend upon the introduction of modern electronic systems in the police service and NHS.
Will this be popular with voters?
An ICM poll for the BBC’s Newsnight found that 55% of people disapprove of Letwin’s plans and 39% support them. Most political analysts believe that the electorate is likely to be highly sceptical of claims that a government can simultaneously increase spending on health and education and cut spending. Nor is there much sign that people would prefer tax cuts to cuts in spending. In a recent poll, Mori found that 73% of voters were satisfied with their standard of living. The truth is that the boost from the fall in interest rates from a peak of 12% under the last Tory Government to 4% today has had a far greater impact on most people’s finances than any increase in taxes. Most agree that the electorate is most likely to vote for whichever party is least likely to take risks with the economy.