Dominic Lawson: Cameron shouldn't rule out tax cuts - or Gordon Brown may beat him to it

The notion that tax cuts are an alternative to economic stability is an entirely false dichotomy
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The Independent Online

In his characteristically good-humoured way George Osborne recently chided me for something I wrote about him in this column. I had argued that he was talking nonsense when he claimed that Margaret Thatcher "did not promise tax cuts" in the 1979 election manifesto. The shadow Chancellor insisted that there had indeed been no cast-iron pledge to cut the overall tax burden in Thatcher's first manifesto as Conservative leader, and that he had considered asking Geoffrey Howe and Nigel Lawson to back him up on this.

So in the same friendly spirit I now draw George's attention to the following letter in the most recent issue of The Spectator: "Pressed to promise tax cuts during the recent Conservative Party Conference, both Mr Cameron and Mr Osborne were anxious to point out that Margaret Thatcher didn't promise tax cuts in 1979. What the 1979 Conservative Manifesto actually said was 'We shall cut income tax at all levels to reward hard work, responsibility and success.' I hope we can now take it that the same non-promise will feature in the next Conservative manifesto. Yours sincerely, Nigel Lawson."

Nevertheless, George Osborne, David Cameron and Francis Maude, the Tory party chairman, have continued, if only in this matter, to follow Josef Goebbels' dictum that if you tell a lie big enough and keep repeating it, people will eventually come to believe it.

This particular porky is not for the benefit of the people as a whole. It is designed only to appease traditional Conservatives who have grown increasingly restless at the absence of any tax-cutting agenda on the part of the new leadership of their party; but such Tories would need to be not so much traditional as senile, to fall for this peculiarly shameless rewriting of history.

Yesterday the Conservative rank-and-file were offered some more substantial succour in the form of the publication of Michael Forsyth's proposals to reform the tax system. Lord Forsyth of Drumlean, who was definitely regarded as "one of us" by Prime Minister Thatcher, had been commissioned by George Osborne when he became shadow Chancellor - before David Cameron became leader. At the time Osborne was promoting the idea of a "flat tax" of the sort now being successfully operated in some states of the former Soviet bloc, and so Lord Forsyth's remit was principally to come up with proposals which would simplify the tax system and make it more attractive to international business within the global economy.

I believe that Lord Forsyth, backed by a team of leading tax experts by no means all of whom are Conservative, has triumphantly succeeded in meeting that original objective. Their proposals would indeed lead to a dramatic and much-needed simplification of a tax structure which has become increasingly perverse in its complexity.

It is both depressing and at the same time unsurprising that the political debate has immediately ignored all that valuable work, and instead become instantly fixated on the single fact that Forsyth's main proposals would involve a reduction in the overall annual tax take of £21bn. To put that sum in perspective, it amounts to no more than one year's worth of Gordon Brown's tax increases - but even to talk in such terms is to miss the point.

As Forsyth's commission, which includes a former deputy chairman of the Inland Revenue, demonstrates, economies as near as the Republic of Ireland and as far away as New Zealand have been able to increase public expenditure and reduce debt - not in spite of tax-cutting and simplification but specifically because of such measures. In other words the notion that tax cuts are an alternative to economic stability, as David Cameron sometimes seems to suggest, is an entirely false dichotomy.

The United States is perhaps the best known example of this: three months ago the US Office of Tax Analysis published its investigations into the effects of the federal tax cuts enacted in the period 2001 to 2003. That non-partisan body argued that without those tax cuts, three million fewer jobs would have been created and real gross domestic product would have been up to 4 per cent lower. That economic growth has, obviously, generated a gigantic increase in tax revenues, which in turn has been used in part to reduce the budget deficit - America's is now smaller than Britain's when expressed as a percentage of GDP. It may be true that America's economy has inner dynamics which are in some ways different from our own. But exactly the same virtuous circle of tax simplification and cuts, especially within the corporate sector, has led to unprecedented economic growth in Australia - a growth which has enabled public expenditure to be increased even as the Government debt has been wiped out.

Perhaps the most telling comparison - and one which particularly impressed the Forsyth Commission - is that of Ireland. At the end of the 1980s, Ireland was close to being an economic basket case, and its per-capita GDP was less than two-thirds of the average for countries of the Organisation for Economic Co-operation and Development. Following a dramatic cut in corporation tax, from 43 per cent to 12.5 per cent, and the flattening of income tax down to just two bands, Ireland has prospered, to the stage where now the average Irishman (not that there is such a person, of course) is 25 per cent better off than the OECD average.

Meanwhile, although Irish public expenditure as a percentage of the country's GDP has fallen, it has grown rapidly in real terms. Those who have a theological devotion to the idea that public expenditure should never reduce in proportion to the economy as a whole will not find that satisfying; but to the real human recipient of public expenditure it is the actual amount that counts: a smaller slice of a much bigger cake tastes every bit as good.

The Irish Republic's example is bitter-sweet for us: across the border, Northern Ireland - which once was wealthy in comparison to its southern neighbour - is a depressing example of what happens when a people becomes overdependent on state hand-outs rather than private enterprise. The simplest solution to Northern Ireland's economic problems is painfully obvious to those who live there: to reduce its corporation tax rate down to the Republic's level. That, however, is most unlikely to happen: Northern Ireland is still under the fiscal rule of a British chancellor.

I can quite understand why Mr Cameron and Mr Osborne are not rushing to endorse any or all of Lord Forsyth's proposals. One of the few joys of Opposition is that you are not obliged to have a fixed policy on anything, and therefore do not present a stationary target to political snipers. But they should take care not to become too entranced by the pleasures of opportunism - else Prime Minister Brown will begin to steal the attractive clothes they have had designed, but disdained to wear.

d.lawson@independent.co.uk

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