'Fixed pie Clarke' versus 'Bigger pie Davis'

Today has been christened Super Thursday in the Tory leadership campaign.  Liam Fox launched his campaign and the frontrunners - Ken Clarke and David Davis - both gave big speeches on the economy.  Mr Clarke's speech was very solid and overlapped (in many respects) with David Davis' 'Gordon Brown's Seven Deadly Economic Skills' analysis.  Both spotlighted Gordon Brown's high spending and stealthy taxation but the two speeches also lifted the veils on two very different economic views.

Mr Clarke is basically a fixed pie man.  David Davis is a bigger pie man.

Mr Clarke believes that spending restraint must precede any tax cuts.  Mr Davis believes that tax cuts are essential to incentivise the kind of growing economy which supports increased public spending.

These two quotes from today's contributions point to the difference...

Ken Clarke: "What I do say is that reducing the tax burden can only follow reducing the growth in public expenditure. Tax cuts that are made before public spending control is achieved can only be financed by borrowing and borrowing is merely tax deferred.  Conservatives are not in favour of tax cuts because they benefit the better off. We know that low tax economies are the successful economies. All of us benefit from the economic growth that low taxation can stimulate.  But we must be honest with people and tell them tax cuts can only come only when they are affordable. And probably the first area for tax relief when we have done the necessary work to make it affordable will need to be pensions and savings rather than cuts in direct personal taxation."

David Davis: "Britain is one of only three countries in the EU where the tax burden will increase both this year and next. In fact, that burden will soon be at its highest level for 25 years.  Other countries have taken a different path and have outperformed the UK as a result. In Australia, for example, the government has increased spending more slowly, run budget surpluses and steadily reduced taxes, lowering the basic rate to 15 per cent and raising the top rate threshold.  Since 1996, Australia's economy has expanded by a third, compared to only a quarter in Britain. And just across the water, Ireland's tax-cutting policies have helped them overtake Britain in terms of the amount of GDP generated per head.  As a flat tax revolution sweeps around the world, fuelling growth and raising living standards, Mr Brown's only response is to bury the evidence of its benefits and to sweep the idea aside. Contrast this approach with yesterday's intelligent speech on this subject by his Conservative opposite number."

Ken Clarke is basically accepting the frame which Labour has chosen for the tax debate.  That frame says that one person's tax cut is another person's spending cut.  It's a frame that tilts the tax and spending debate to Labour's advantage and the Clarkeites would rightly argue that it is the way most voters see the tax debate.  A Clarke-led Conservative Party would say to the British people that you can have lower spending and lower taxes but the spending restraint must happen first.  Mr Clarke's remarks do point to the economic benefits of low taxation but that message is secondary.

David Davis - and George Osborne yesterday - are both wanting to escape from Labour's frame.  They want to argue that taxes need to be used as an economic tool.  Tax cuts, they say, are essential to a healthy economy and we must cut (or dramatically simplify) taxation if we are to keep Britain a hi-growth, hi-employment economy.  Mr Davis emphasises spending restraint but the incentive effects of lower taxation are uppermost in his analysis.

The 'Clarke versus Davis contest' - if that is what this leadership contest becomes - will be a very real contest.  Ken Clarke is a multilateralist (believing in the EU and UN) and is opposed to the Iraq war.  David Davis is a Eurosceptic and supporter of the Iraq stage of the war on terror (a position he confirmed - albeit a little half-heartedly - on today's World at One programme). The different emphases that characterise their economic worldviews represent another critical point of difference.

Comments

[Samuel Coates]

It'd be very helpful to our image to break out of the "tax cuts = spending cuts = pure evil" frame!
The way Ed sets out the contest I do wonder if Clarkes electoral advantage would be worth it.

[James Hellyer]

Ken Clarke is right. It pains me to say that, but it is true.

We cannot cut taxes without controlling spending first. At the last election we promised "tax cuts" and offered efficiency savings as a means of funding them. The problem was that if these cuts couldbe realised, it would take years to realise them. As a result, we were proposeing to cut taxes and fund expenditure by borrowing (one cause of tbe Lawson boom and bust).

[James Hellyer]

"Mr Clarke believes that spending restraint must precede any tax cuts. Mr Davis believes that tax cuts are essential to incentivise the kind of growing economy which supports increased public spending."

If you cut taxes *now* the economy may grow in the *future*. This does not fund expenditure now. Reduced tax income would lead to a shortfall, that would have to be financed by borrowing.

Clarke's position is a necessary precursor to the one articulated by Davis.

[Editor]

I fear your man Dr Fox may not agree with you on this one James.

Today's Independent says: "Dr Fox said tax cuts were "one of the elements of a prosperity agenda". He said the party needed to "make the case for lower taxes in the first half of a parliament, before we come to specific measures in the second.""

Spending restraint is important - no candidate disagrees on that. The danger is that if we wait until spending is under control and don't unleash the incentives effects of lower taxation until near the end of a parliament that's three/ four years of extra growth foregone.

We need to make the case that cuts in certains forms of taxation will not endanger revenues (perhaps - quite the reverse) but are essential for the protection of British jobs and competitiveness.

It isn't an argument we have made - as a party - for a long time but Davis, Fox and Osborne all seem to appreciate that we must begin to.

[Selsdon Man]

A future Conservative government will need to deal with the pensions crisis (that will lead to a higher welfare burden) and increasing health and care bills for the elderly. It will also be locked into huge PPP bills and will need to deal with Network Rail's huge debts.

Cutting certain taxes will raise revenues and that is where we should focus our attention. The James Review only scratched the surface. It will take a tough government to deal with Brown's army bureaucrats - and that includes local government too.

[James Hellyer]

A government has spending commitments in the present. Tax cuts have the effect of reducing current tax income, even if in the longer term they will increase revenues through economic growth and fewer cases of evasion.

Unless proposed cuts are matched with controlled or reduced expenditure, then they will have to be financed through borrowing. That's a gamble on future revenues being as predicted.

We need to make the case for lower taxation, but any claim that taxes can be cut without either borrowing in the short term, or spending cuts, will fail to convince the electorate.

[malcolm]

I thought Clarkes honesty was extremely refreshing and I hope his speech re Gordon Brown recieves wide publicity.
What was equally gratifying was the Treasurys pathetic response.Has Brown lost his confidence?

[Selsdon Man]

We need to look at corporate as well as personal taxation. Countries in Eastern Europe, e.g. Estonia, have low corporate taxes as well flat taxes. Tax competition will increase dramatically over the next few years - to the dismay of the EUrocrats.

Companies will relocate. The Baltics have a large mobile and furniture industry - Swedish firms that found home too expensive.

We will have no option but to tackle our over-bloated and expensive government and reduce taxes across the board. If we do so, we could attract firms in western Europe with high taxes, notably France.

The next Conservative government will need to cut non-essential expenditure to fund the extra costs that I set out above and the tax cuts to make us competitive. That will require Ministers with hands-on experience. There will be no time to learn on the job.

[Selsdon Man]

Both Labour and the Lib Dems have been rattled by Ken Clarke's huge impact, especially in this week's polls. Gordon Brown seems to be a worried man, especially as Ken's attack was so personal and on the mark.

[Simon C]

"We need to make the case for lower taxation, but any claim that taxes can be cut without either borrowing in the short term, or spending cuts, will fail to convince the electorate."

Isn't this where David Willett's idea of reducing the damand for the state - of which healing the Broken Society would be a part - comes in?

[Michael McGowan]

I find it disappointing that none of the candidates seem able to address taxation in the broader context of what it will take to turn Britain into a high-skill high-growth economy. It is emphatically not that kind of economy now, notwithstanding spiralling public expenditure bills and a spiralling public payroll. It is also obvious that Gordon Brown and the hugely overrated Ed Balls haven't got a clue about how to make it so. Either our politicians do something about this now....or we will have very uncomfortable structural changes forced on us, quite rightly, by emerging economic giants such as India and China, not to mention the Baltic States.

[Editor]

Yes, Simon.

Conservatives should show that reducing the size of the state (and the public expenditure burden on the economy) cannot be about a precipitate reduction in the supply of government services but must be sequenced in response to a long-term programme of social reform. That social reform will include family strengthening (two parent families need an average £100,000 less from the taxpayer over a sixteen year childhood than lone parent families) and zero tolerance of crime and drugs. Crime places a huge burden on the Exchequer and drug abusers are not effective citizens.

Social and public service reform are the medium to long-term keys to a smaller state.

Simplication of all taxation and reductions in business taxation (thank you Selsdon Man) are the interim means to maintaining revenues and boosting the economy.

[Simon C]

"I find it disappointing that none of the candidates seem able to address taxation in the broader context of what it will take to turn Britain into a high-skill high-growth economy."

Is that going to mean a flat tax Michael? Or at least a flatter and much simpler system. George Osborne is looking carefully at this. He's not a candidate, but he is pointing the way forward.

Fox hasn't said much on the economy yet - although he has pointed out the competitive threat from India & China on an number of occasions. I haven't read what DD or KC said yesterday in their offerings on the economy - any clues as to their stance?

[Selsdon Man]

In moving towards a flat tax, it is politically necessary to minimise the number`of people who will be worse off. It will take time to unravel Gordon Brown's complicated system. We will need a programme of simplification that could take a few years to achieve. George Osborne's approach is right.

[Simon C]

Further to my last, I have now read the Editor's excellent summaries at the top of the Blog.