Philip Hammond MP: This period of economic certainty would be the wrong time to cut the growth of public spending

ConservativeHome has launched a campaign to encourage the Conservative Party to reduce the growth in public spending.  Yesterday we published a poll of members that showed overwhelming support for that campaign.  In this Platform piece Philip Hammond MP, Shadow Chief Secretary to the Treasury, explains why the Tories have decided to match Labour's spending plans until 2010/11.

More than two years ago David Cameron and George Osborne said that a Conservative Government would share the proceeds of growth between the funding our public services need and the competitive lower taxes our economy demands. This means that over an economic cycle the economy will grow faster than the government, and government spending will fall as a percentage of GDP. Pursuing this approach over an economic cycle creates the headroom for sustainably lower taxes. And let no one be in any doubt that we are a party that believes in lower taxes.

After 10 years of unsustainable increases in public spending, the Labour Government has now been forced by the state of the public finances to adopt exactly this policy for the three years until 2010-11. Where we stand through principle, they have been forced by necessity. Last September George Osborne confirmed that a Conservative Government would adopt these spending totals, and that, like Labour, we would review the final year’s total in a spending review in 2009.

These spending plans imply that spending will fall as a percentage of GDP over the next three years, with a real terms growth rate for public spending of 2.1%, well below the 2.75% trend growth rate of the economy. To place this growth rate in context, it is half the average 4.0% growth rate of public spending under Labour’s spending reviews to date, and the same as the 2.1% growth rate of public spending during the first Thatcher Government from 1979 to 1983.

Gordon Brown’s economic incompetence has failed to prepare us for this period of economic uncertainty by leaving us with the largest budget deficit in Europe. As a result, one of the key challenges facing a new Conservative Government will be to restore the public finances to health. By continuing to ensure that the economy grows faster than the government over an economic cycle this is exactly what we will be able to achieve. Research by the OECD has found that explicit expenditure targets, such as our policy of sharing the proceeds of growth, have been a crucial feature of successful fiscal consolidations around the world.

Some people have argued on this site that if economic growth falls below 2.1% we will no longer be able to keep the growth of spending below the growth rate of the economy. Our policy of sharing the proceeds of growth is defined over the economic cycle in order to address precisely this possibility. Over the course of an economic cycle a period of below trend growth is, by definition, followed by a period of above trend growth. History shows that public spending tends to rise during economic slowdowns as a result of higher benefit spending. For example, spending grew by 5.3% in real terms during 1991-92 and by 4.4% the following year. Similarly, spending tends to slow during economic upturns as benefit spending falls.

A period of economic uncertainty, such as we are now experiencing, would be exactly the wrong time to raise taxes or cut the growth rate of spending. Instead, by continuing to share the proceeds of growth over the economic cycle we will be able gradually to restore the public finances to health without the need for badly timed spending cuts or tax increases that would risk destabilising the economy at a moment of vulnerability.

Today, we have won a reputation for economic competence for the first time in a decade and a half. That is due to our commitment to economic and fiscal stability. Our hard won credibility as a party would be put at risk if we were to lose our collective nerve and flip-flop on public spending policy at this critical moment.