My party must prove to the public it has buried Trussonomics forever
What started with a hum in July has grown into a loud and rhythmic beat, and will next month become a deafening wall of noise. For what you hear is the sound of tax rises, as Keir Starmer and Rachel Reeves prepare to put up taxes not only on the super-rich – as they claimed while campaigning – but on all of us.
It will feel excruciating for Labour MPs to watch the Chancellor confirm in her Budget that she is removing the winter fuel payment from millions of pensioners, while omitting to mention the abandonment of the non-dom tax changes Labour promised in opposition.
In government, rhetoric always meets reality, and the Treasury has told Reeves the truth. Not only are her planned tax rises killing consumer and investor confidence, they are causing an exodus of millionaires, who are taking their money elsewhere.
For Labour to raise the revenues they want – and made necessary with their giveaways to the public sector unions – the Government will need to increase taxes for the many, not the few. This presents the Conservatives, meeting for our conference this week in Birmingham, with a political opportunity. Starmer and Reeves are not only breaking another promise, but doing what Labour always does: taxing, spending and borrowing too much, putting the unions – not the public – in charge, and pursuing ideological objectives – from labour market regulation to suicidal energy policies – that will destroy our prosperity and security.
Yet my party will need to tread carefully. So often the demand is made of the Tories to be radical, to make the case for tax cuts and once in government, get on with them. But things are not so straightforward: the public may dislike the burden of taxation but expect well-funded services, the failed Trussonomics experiment looms large, and Labour, as the party of government, dictates the political narrative far more than the Conservatives can in the years ahead.
So, under the new leader we elect in November, the Tories will need to prove our commitment to public services, repudiate Trussism, and establish a clear approach to tax. These are my suggested six principles.
First, a good society, not a particular level of taxation, is our fundamental objective. A good society demands prosperity and security, dignity and freedom, and belonging and purpose, for all its citizens.
It requires an understanding that when the state gets too big it can undermine the market economy that generates our wealth, and weaken the strength of community and social trust. But that does not mean we should be hostile to the state, nor to political and legal authority. While in their extremes, the state, the market and community can harm one another, in a good and well-governed society each should reinforce the others.
Second, a strong economy needs fiscal responsibility. Tax cuts without a plan are as irresponsible as spending more than we can afford since both risk spooking the bond markets, increasing the cost of borrowing for government and households alike.
There may be some room to change the fiscal rules Rachel Reeves set herself before the election, which would allow the Government to borrow more to invest. But our debt-to-GDP ratio is around 100 per cent of GDP, and the bond markets are watching closely. The benefits of tax cuts to households and to consumer confidence can be outweighed quickly by increases in interest rates.
Third, the economy needs private and public investment. We need more houses, reliable and affordable energy, better skills and training, and improved digital and transport connectivity. We need more research and development, to get better at integrating academic research with commercial need, and more investment in plant and machinery. Targeted tax cuts – like full expensing, introduced by the Conservatives – is one way to improve private investment, but we need the state to invest too.
Fourth, we must fund public services, and face rising demand for health, social care, pensions and defence spending. Among the quangos, regulators, welfare bills and interference in everything from registering ownership of a chicken to the diversity of a company’s workforce, there is much the state does that can be stripped back. To keep costs down and improve standards, we need public service reform, especially with the National Health Service, but with an ageing population and growing threats to our security the big-ticket items will need funding properly.
Fifth, reform and growth are what will allow us to reduce taxes. Labour will undoubtedly increase the spending baseline, creating scope for future fiscal reform.
But the dilemma we will face is that while tax cuts can help the economy, with the constraints we face economic growth is the only route to sustainably lower taxes. Until we achieve significant growth – which will require a full-spectrum approach of industrial strategy, investment, supply-side reform and more – we must reform the state and our tax system to afford targeted tax cuts.
Sixth and last, we should target tax cuts at virtuous behaviour that benefits society. If the tax cuts we can offer must be targeted, we need to prioritise. So, while Labour likes to talk about “sin taxes” to justify its tax grabs, we should talk about tax cuts for those things we believe to be virtuous: tax cuts to promote investment, stimulate innovation, and help couples to form families and bring up children.
Out of the ruins of a landslide election defeat, among the policy wonks and politicians, sometimes in papers but often at this stage behind closed doors, it is possible to discern the beginnings of new Conservative economic thinking.
The direction of travel is a smaller but stronger state, reindustrialisation, a more realistic energy policy and supply-side reforms to get things built. There is clear agreement on the need to reform welfare and end the years of mass immigration.
There is much more work ahead – and years in opposition in which to do it – but tax will be a vital part of the conversation. We need to hold Labour to account, avoid rushing early to hard commitments, and establish our position. But rewarding virtue – and in particular investment, innovation and families – is the right place to start.
Nick Timothy is Conservative MP for West Suffolk