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Coffee House

No time to tinker

18 May 2012

5:17 PM

18 May 2012

5:17 PM

Next week, the Institute of Directors and the Taxpayers’ Alliance will
release what I humbly suggest will be the most powerful summary of the case for radical supply-side reform in a generation. The report of the 2020 Tax Commission runs to 417 pages, choc full of
academic literature showing how big government chokes growth, and looking at what the optimal size of the state is. Broadly speaking, government spending is about half the size of economic output
now and the optimal size is about a third. The recommendations are not being released until Monday, but it opens a very timely debate, which I preview in my Telegraph column. Here are my main points.

1. There is no recovery in sight. Independent forecasts for 2015 are coming in, showing there will be no economic recovery to speak of. RPI inflation will be high, unemployment
nowhere near pre-crash levels. But here’s what’s really striking: after five years of talking about cutting the deficit, the UK is forecast to have a deficit of 5 per cent of GDP — which
would then be the highest in the Western world according to IMF forecasts:

2. This ought to worry the PM. David Cameron is soon getting a new app on his iPad to show him various metrics (which unkind souls have dubbed iFail) and I hope it will include the
2015 forecasts collected by the Treasury. The figures should shock him, and protect him from believing his speechwriters’
nonsense about ‘dealing with the debt’. What he’s doing is not enough, nowhere near enough. Without structural supply-side reform, there is no reason why our debt-burdened economy should move any
faster. And these bleak forecasts don’t factor in a eurozone crisis or a QE-related unraveling.

3. There’s no shame in Osborne thinking again. I can understand why the Chancellor repeated Brown’s policy of publishing a five-year spending plan: the markets wanted a credible
deficit reduction plan, and Osborne has certainly given them one. But no battle plan survives contact with the enemy. There is no indignity in adapting to changing circumstances, nor in changing
direction. Osborne badly needs to. Because he’s on a road to nowhere. I once asked Black Swan author Nassim Taleb what he thought of five-year Budget plans. ‘Bullshit,’ he replied with a smile.
‘Look at past five-year plans, how many have worked? It’s like someone getting married eight times, each time thinking "this time it’s for love."’ I asked him how long should governments
draw their budgets for. ‘One year at a time,’ he said. ‘The error margin for five years is monstrous.’


4. Britain’s economic problem: too few producers. Cutting government spending, while vital, is not enough. Ben Brogan revealed in his column on Wednesday that Steve Hilton demanded 15
per cent corporation tax. That is precisely the kind of shock-and-awe tax cut that could kick start a recovery. It didn’t happen. This policy exemplifies the difference between tinkering, and
radical change. The latter is needed, because we have major problems.

5. Will Cameron get radical? He is radical on welfare, he is on schools — and either one of these two reforms would make Cameron a success by my book. Being radical on the
economy is not easy, as there is so little covering fire. The Institute for Fiscal Studies, which has huge influence over the UK debate, is concerned with how to divide tax money – not about
supply-side reform or dynamic modeling. Part of the rationale for the 2020 Tax Commission is to actually show that studies backing lower taxes do exist. As Ben said in his column, Hilton’s
departure is a bad omen suggesting that Hilton — a genuine radical — concluded that Cameron was in for an easy life. I hope that’s not true.

6. The old ways are failing. Cameron’s strategy was to look at previous recoveries, and close the deficit with an 80:20 spending cut to tax rise ratio. But so far, it’s been closer
to 50:50. He is still playing by the Treasury’s old rulebook, using its static model which fails to properly take into account the knock-on effects of tax rises (especially when coupled with a
horrendous squeeze in living standards). The VAT rise to 20 per cent, for example, was calculated by the Institute for Economic Affairs to have cost almost a quarter of a million jobs and hit
growth so badly that it pushed the deficit up — the opposite of the intention. The North Sea oil tax in the 2011 Budget was followed by a 20 per cent fall in production and 50 per cent
collapse in exploration. These high taxes are having a far worse effect that Osborne realised.

7. This isn’t about ‘modernisation’. Radical supply-side reform has always been rejected out of hand by the Cameroons, on the grounds that this is what lost the 2001
and 2005 election. Take this extract from Michael Spicer’s diaries, 12 Jan 2006.

‘Had a 90-minute meeting with Oliver Letwin, head of policy. I say “we won’t win unless we beat the government on economics — by destroying their credibility and/or coming
up with a believable policy of our own, which in my view starts by reducing taxes to stimulate growth and personal well-being.” “We’ve done that before,” says Letwin, “and
it didn’t produce results.”’

So the Cameroons didn’t come up with their own economic policy, signed up to Brown’s, and when the crash came they had nothing to say. The idea of proper supply-side reform has always
been viewed, in Cameroon circles, with suspicion — as the agenda of the vanquished David Davis, or the failed William Hague. It’ s a reminder that the Tory Party is still in therapy: plans for
the future are always seen in the context of the past.

8. David Cameron remains Britain’s single greatest hope.
I know that some CoffeeHousers have given up on Cameron — but ask yourselves: who would do better? I genuinely can’t see anyone
who would do anywhere near as well. We take for granted now the fact that he is an articulate, natural leader, one we can be proud of on the world stage (remember Brown coming after Obama like a
Labrador?), his bold foreign policy instincts over Libya (how soon that victory has been forgotten), and his ability to put a radical team in at education and welfare. Cameron and Osborne took the
helm at a time when it seemed there would be no economic battle to fight. Our best hope isn’t another leader. It’s that Cameron realises that Hilton was right, radicalism is needed, and that it’s
time to be bold and as Phil Collins says today a pro-growth reshuffle that promotes Liz Truss, Kwasi
Kwarteng, Andrea Leadsom and other members of the Free Market Reform Group of Tory MPs would at least show he recognizes the talent in his own party.

9. The road less travelled. In next week’s Spectator we’re reviewing the latest book by the nature
writer, Robert Macfarlane. In it, he quotes the Spanish poet Antonio Machado: ‘Traveller, there is no path; paths are made by walking.’ This holds good for politics: the best leaders don’t follow a
path, but make their own. Cameron is still following the Brown path. Departmental spending cuts of 2 to 3 per cent a year, national debt rising by 60 per cent — these were proposed in
Darling’s 2010 Budget and are being enacted by Osborne now. All mixed in with tax credits intended to manipulate child poverty metrics. As Cameron so powerfully pointed out, the Brown road led to
disaster. It’s time he found a path of his own.

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