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Not the big state. Not the small state. But the affordable state.

By Paul Goodman
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This is the fifth in ConservativeHome's series of posts counting down to the Autumn Statement. On Tuesday, Tim Montgomerie said that George Osborne's economic narrative is taking shape. Yesterday, Peter Hoskin urged Mr Osborne to ditch his current fiscal rules, and Tom Frostick argued that the Chancellor must target wealth. And, earlier today, Andrew Lilico set out some of the international risks for the UK economy.

Substitute private vouchers for state education.  Raise the teacher-pupil ratio.  Replace parts of the NHS with compulsory private health insurance.  Cancel Trident.

Or so the Central Policy Review Staff (CPRS) - a forerunner of the Downing Street Policy Unit - recommended in 1982.  "The result," Nigel Lawson writes in his memoirs, "was the nearest thing to a riot in the history of the Thatcher administration...the episode played into the hands of the 'wets'.  They not only managed to get the CPRS report shelved at the meeting; but made sure that its contents were leaked to the Economist, which obligingly described it as 'dismantling huge chunks of the welfare state'.  Horrified articles duly appeared in the Guardian and the 'heavy' Sunday papers".

Margaret Thatcher "was forced to state publicly that the Government had no intention of pursuing any of the options in the CPRS paper"..."Indeed, the only casualty was the CPRS, which within a year Margaret, still smarting from the September 1982 episode, had disbanded for good."

I set out last week on this site why the public spending challenges are at least as great as when Mrs Thatcher began her first term; why ending our EU contribution and overseas aid would still leave the deficit at over £100 billion, and why health and pensions are the biggest long-term spending challenges.  I also quoted some radical options that have been floated to deal with these, including raising to state pension age to 70 rather than 68 by 2046, people funding their own pensions after the age of 90, and asking people to "insure against, or save for, the first £30,000 of [hospital] costs".

These are CPRS options, 2012-style.  David Cameron would almost certainly doom the Conservative Party to defeat at the next election were he to adopt them.  Winning public support for cutting spending was difficult enough in Lady Thatcher's day, but she still managed to gain a majority of over 40 in 1979.  "Any future government which sets out honestly to reduce inflation and taxation will have to make substantial economies," the Conservative manifesto declared, "and there should be no doubt about our intention to do so."  Britain, it declared, "is faced with its most serious problems since the Second World War".

The task proved more hazardous in 2010.  The  Conservative manifesto was even more upfront about the need to cut spending than its predecessor: "We will safeguard Britain's credit rating with a credible plan to eliminate the bulk of the structural deficit over a Parliament," it said.  Janan Ganesh writes in his biography of George Osborne that the Chancellor knew the electoral risk he was running when he committed a future Conservative Government to spending reductions.  "Now let's see if I've cost us the election," he said to his team after his austerity-promising speech at the 2009 party conference.

Who can accurately weigh knows the factors that cost the party a term in office on its own? The sheer scale of the mountain it had to climb...voter distrust of the Cameron/Osborne duo...the bungled election campaign...disillusion with all politicians after the expenses scandal - all played a part.  But another ingredient, echoed in America's recent Presidential election, was voter resistance to spending cuts.  Something in the atmosphere, in the instincts and reflexes of a crucial segment of the public, seems to have changed over the past 30 years.  Labour's campaign air war was an embarrassment.  By contrast, its trade union-led ground war was effective.

Mr Ganesh writes: "One of [Osborne's] Treasury Ministers estimates that the speech cost the party at least twenty seats at the election but made it easier to govern."  The tentacles of Gordon Brown's tax credits had midlands and northern marginals in their grip.

What the Chancellor says next week about his targets is ultimately less important than what he does in the coming spending review.  He must set out spending cuts without alarming more voters - an apparently impossible task.  Here's what he should do:

  • The short-term - ideas for savings. The spending review will, inevitably, be as much about meeting short-term needs as much as long-term challenges.  None the less, there are savings that could be made, and I will mention some towards the end of this article.
  • The longer-term - changing the climate of opinion.  Mr Osborne shouldn't set out CPRS options, 2012-style, any more than David Cameron should.  But he should deliver a major speech on public spending next year, set not so much against the backdrop of the deficit and debt, but against that of our ageing population and the new rising economies.  It should describe the global challenges honestly but hopefully.  It should be more optimistic about our long-term growth prospects than I was on this site last week, and more descriptive of the opportunities for British business as demand for products rises in those new economies.
  • A Commission on Public Spending?  The speech should either have news to announce or make a new argument about spending - and, by extension, about the size or role or both of the state.  A year ago I would strongly have advised an all-party-and-none Commission on Public Spending to make recommendations about where future spending reductions might be made - what the state should do, and how - in order both to ensure that the health and pensions spending problem was addressed and to get the fingerprints of senior Labour and Liberal Democrat figures in the axe. 
  • Not the big state nor the small state...  However, I believe that the last budget marked a turning-point for the Government.  Those senior LibDem and Labour figures are now likely to believe that Ed Miliband will be the next Prime Minister, and won't help to do for public spending what Lord Hutton did for public sector pensions in the early part of this government's term.  That being so, the Chancellor should make a new argument about spending.  I am not prepared to give up on the smaller state ideal, without which the lines which separate our party from its social democratic opponents would dissolve.
  • ...But the affordable state.  None the less, I agree with Tim Montgomerie that only a small percentage of voters yearn for a small state, and that many more feel that when Tories speak of a smaller state their words are a code for fewer public services.  I suspect that the party would make more progress with the case for an affordable state.  The evidence is that voters grasp that countries, like people, can't live beyond their means - a view that underpins polling support for deficit reduction.  So to help kick off debate about how much spending is affordable - and what it should be - should be the aim of such a speech.
  • Conservative MPs need to weigh in... Tory MPs have less room for manoevre than think-thanks (because their opponents are watching their words, ready to exploit any hostages to fortunes), but more than Mr Osborne.  Bodies such as the Free Enterprise Group, which is leading the charge on affordability, thus have the opportunity to continue to probe the future of, say health spending - as Phillip Lee and Chris Skidmore have been doing.  There is no reason why non-parliamentary groups such as Bright Blue and Conservative Voice shouldn't take up the theme.
  • ...As do think tanks... The think tanks are ahead of the game. Reform's Andrew Haldenby, the IEA's Ruth Porter, Chris Nicholson for Centre Forum, the Taxpayers' Allliance's Matthew Sinclair, and Policy Exchange's Neil O'Brien have already set out plans to reduce spending by up to £50 billion on this very site.  Their short-term ideas included scrapping the Green Investment Bank, ending the Regional Growth Fund, abolishing the High Speed 2 plan, stopping richer people living in social housing, freezing the DFID budget, digitising public services, ending national pay bargaining and privatising more prisons.
  • ...As does the right-of-centre media... Daniel Hannan warns about the consequences of quantitative easing.  Fraser Nelson frequently clocks the rise in debt.  But all that borrowing and printing is for a predominant purpose - to pay for public spending parts of which, in the long-term, are simply unaffordable.  So ideas are needed about how to reduce the supply of government (as well as the demand for it) not in single editorials or comment pieces, but in entire editions of right-of-centre magazines and for whole weeks in right-of-centre newspapers.  ("Read all about it! Your cutting public spending special!")


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