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Bruce Anderson: Cameron can say he will cut taxes and deliver on services, but will the voters believe him?

Monday 18 February 2008 01:00 GMT
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Tories regard taxes as a necessary evil. They also tend to be wary of Sigmund Freud. Yet in at least one respect, his theories are useful. The Tories' superego recognises that the modern state must consume tax revenues on a scale which would have horrified Gladstone, let alone his Tory contemporaries. But deep down, the Tory idea is tax cutting.

There is a compromise. Tories believe that prudent economic management should make it possible to cut taxes and pay for decent services. They would also point to the mass of evidence that low tax rates promote economic health. Every successful peace-time Tory government has cut tax rates, so every Tory opposition would normally highlight tax cuts in its appeal to the public.

Back in the late 1970s, the last time a Tory opposition had a serious chance of winning an election, Patrick Rock – later an adviser to Chris Patten and Michael Howard – came up with a phrase which found its way into the knockabout sections of a number of front-bench speeches. "Cows moo, dogs bark and Labour puts up taxes''. There was an obvious follow-on line: "While we cut them''.

That line of attack helped the Tories to win and go on winning. By the 1990s, it had even converted a number of Labour MPs, especially the Blairites. One would hear them repeating the same point. "The pollsters ask people if they'd pay more tax for better services. The people say yes. More fool us, we believe them and put it in our manifesto. The lying so-and-sos then vote against us. The voters may not like to own up to being selfish, but they are.'' In Labour's case, the Freudian categories were reversed. Tony Blair's New Labour electoral superego prevailed over Old Labour's tax-and-spend id.

Ten years after Tony Blair won by promising not to raise income tax rates, it might seem that the Tories could earn popularity by promising to cut them. Yet Messrs Cameron and Osborne have been reluctant to fly the tax-cutter's flag (any suggestion that they disagree on tax is hogwash). This does not mean they have abandoned the faith. But they are reluctant to make a premature avowal of their convictions, for sound political reasons. Tony Blair has made life hard for them.

Mr Blair had two enduring propaganda successes. He trashed the Tory brand, especially its reputation for economic competence. He also persuaded a lot of voters that the public services were about to collapse and that only Labour could rescue them. On top of that, he kept his pledge not to increase income tax rates, consoling himself with a hitherto unsuspected range of stealth tax rises. As a result, the public mood changed.

In 2004, David Cameron, George Osborne and Steve Hilton were involved in preparing for the next election. Although all of them assumed that tax cuts would be popular, they used private polling to confirm this. They had a shock. Asked if they wanted tax cuts, the voters replied: "No.'' Initially, the advisers decided that they had asked the question the wrong way. They also concluded that the voters were reluctant to admit their true feelings. So there were other attempts, using sophisticated polling techniques to reach behind prevarication. The answer was still the same.

A lot of voters had two unshakeable opinions. First, that the Tories would not keep their promise to cut taxes. Second, that they would use the pursuit of tax cuts as an excuse to slash services. Although none of that would have been true, the future nucleus of the Cameron team realised that it was confronted by invincible ignorance. The 2004 polling exercise was a crucial stage in the intellectual genesis of Cameronism.

The voters' reluctance to accept Tory promises is not the only respect in which ignorance must influence political calculation. Here, Lady Thatcher is to blame. Few voters understand economics; her fault for not making it part of the school curriculum. Most voters think of the economy as a cake of a set size, so that once a slice is cut from it, there is less cake to go round.

In reality, there is no set size. Given a healthy growth rate, extra slices will appear; in a recession, the cake will shrink. If the economy grows at 2.5 per cent a year, it should be possible to cut tax and increase public spending while also ensuring that the national debt falls as a proportion of GDP. At three per cent a year, it ought to be possible to harvest all the fruits of economic virtue: tax cuts, spending increases and debt repayment.

There is, of course, a radical alternative to the cake. Arthur Laffer once drew a curve on a paper napkin. He was trying to prove that lower tax rates can produce higher tax yields. There is plenty of evidence for this, not least from the UK in the 1980s. But the exuberance of the Laffer curve has led some free market economists to go further. If lower rates produce more cash, why not accelerate the process by dramatic tax cuts even if this leads to a sharp increase in government borrowing? That would be a short-term problem, because in three or four years' time, the extra revenue would eliminate the borrowing. The tax cuts and the higher growth rates would bring long-term benefits.

It is possible to find British Tory Lafferites, especially after a good dinner. But they have little influence in the Cameron inner circle. By temperament, Mr Cameron is a fiscal Conservative. He thinks that governments ought to live within their means. He doubts whether the world's enthusiasm for greenbacks, which funds the US deficit, would also apply to sterling.

He also recognises that whatever attitude they take to their credit cards, the voters will not believe in something for nothing when it comes to government expenditure. If any opposition were to say that it was possible to introduce dramatic tax cuts while protecting services and that our flexible friend the public sector borrowing requirement would take care of the strain, it would lose the election.

Messrs Cameron and Osborne will remain cautious about promising tax cuts without explaining how they are to be funded. In one respect, however, the Tories can benefit from a change in the public mood. Over the past two or three years a lot of voters have come to believe that this government is wasting a lot of money. As a result, it should now be possible for Tories to argue that a tighter control of public expenditure could lead to a more effective use of public funds.

There is a final factor. Over the past couple of years, David Cameron has persuaded a significant number of voters that he is unequivocally committed to high quality public services. As a result, he should be able to succeed where his immediate predecessors failed: to promise to support the public services and offer the hope of tax cuts. If William Hague, Iain Duncan-Smith or Michael Howard had made those two points, neither would have been believed. In Mr Cameron's case, there is a good chance that both will seem credible. This is why he is on course to win the next election.

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