A TOTTERING Prime Minister, mounting economic woes and the main opposition party streaking ahead in the polls: we should by now have a clear idea of how a David Cameron Government would tackle the economy. But there is as yet no clarity on what that alternative policy is.
There are several reasons for this. One is the continuing concern in Conservative circles with "brand decontamination": the need to bury associations in the public mind linking the Conservatives with swingeing spending cuts, tax perks for the well-of
f and harsh economic medicine.
A second is a fear – understandable given recent experience – of announcing policies that the Government could steal or in some way neutralise.
And the third is fiscal pragmatism: what sense does it make to work on a detailed programme of economic and fiscal measures when the downturn is deepening and slashing away at tax receipts and driving up Government borrowing?
Nor is there any sign of a break in the clouds. The UK banking system shrank its assets by £340bn or 4.6% in the six months to July, the biggest drop on record. Money market interest rates indicate further funding pressures and balance sheet strains. Meanwhile, according to the House Builders' Federation, site visits, reservations for new houses and prices all hit new lows in July. Forecasts for growth overall continue to fall. The consensus forecast for this year is now down to 1.4% (against 3% for 2007), and for a further slowdown to 0.9% in 2009. Some are now forecasting a 0.3% fall in GDP next year.
Little wonder Gordon Brown and his Chancellor, Alistair Darling, are dreading the year's Pre-Budget Report in November. This will see the abandonment of the Chancellor's utterly unrealistic economic forecasts in the spring Budget for this year and next – 1.75 to 2.5% growth in 2008, followed by a recovery to 2.25 to 2.75% growth next (dream on). It will almost certainly see the bursting of Brown's 'golden rules' limiting the growth of Government debt and the Budget deficit. Independent forecasts suggest the Budget deficit is likely to soar from £36.4bn in 2007-8 to £55bn this financial year, powering on to more than £80bn by 2010-11, well above the Maastricht 3% of GDP ceiling.
And here lies the reason why, ironically, the Conservatives might dearly like the Labour administration to struggle on for the full length of its term. The likelihood is that over the next year it will be obliged, either by public warnings from the European Union and the IMF or a full-blown slump in sterling, to take action to bear down on spending and borrowing and bring down the Budget deficit. Such action would involve an unpleasant combination of tax rises and spending plan reductions. Better surely, from a Conservative perspective, that a doomed Labour administration has to take the unpopular action than an incoming Tory Government.
But the opposition will be under growing pressure to present to voters something more than a blank face when the party conference season gets under way. This will be difficult for a Cameron leadership that rose to prominence when economic issues were well down the voter priority list and which made much play of a commitment to environmental and Green issues. The credit crunch and the slump in the housing market have re-instated the economy as the prime concern among households.
The Prime Minister's leadership style has also been widely criticised for being too serious and gloomy while that of Cameron is seen as not serious enough. The Cameron entourage has come to look effete, lightweight and lacking in a credible programme to address the economy. Set against the likelihood that we will be in recession for most of next year, the slogan that the Conservatives would "share the proceeds of growth" has come to sound glib and vacuous.
However, shadow chancellor George Osborne is moving towards a sharper definition of purpose and objective. He is already shaking loose previous commitments to match Labour's public spending plans. This now appears to extend only to the financial year 2010-11, suggesting the party would have only a few months of such constraint. Given that total managed expenditure will by then have ballooned out to almost £680bn against £586bn currently, it is hard to believe that some savings and economies in this total could not be made. A modest saving of just 2% would yield £13.6bn, and you need only visit the website of the Taxpayers' Alliance to see where money could be saved.
What, meanwhile, of tax changes? There are two the Tories should consider. First, the fiscal system needs to move away from penalising savers and restore incentives for households to save rather than borrow. It is the borrowing explosion of the past decade that has landed the housing market and the economy in trouble. A Conservative administration might consider making interest income and dividend receipts on the first £10,000 of savings free of tax. Rather than short-term schemes to subsidise mortgages, help on savings would help prospective house-buyers raise the larger deposit now needed. Taking more savings out of tax would also help encourage more pension saving and address the shortfall in pension provision that has been a longstanding feature of personal finances.
Savings encourage independence and self-reliance, and measures to boost savings would help curb Government spending in future years needed to address soaring pensioner poverty. And second, there must be early action to cut Corporation Tax. There are two arguments for this. First, by 2010 we will desperately need a recovery to lift us out of what will be by then a two-and-a-half-year trough. The key dynamics needed to bring about a recovery are business investment and entrepreneurialism. It is the entrepreneur who has historically always played a critical role in lifting us out of recession. The problem this time around is that business has much more regulation – and regulatory costs – to contend with.
Another compelling reason for a Conservative administration to take the axe to Corporation Tax is that corporate tax rates continue to fall worldwide. A survey last week from accountants KPMG shows that corporate tax rates fell by a further 0.9 percentage points worldwide to an average of 25.9% against 26.8% previously. The UK corporate tax rate, even after a two percentage points cut to 28% this year, remains higher than this global average and higher than the EU average rate which declined 1% year on year to 23.2%. According to the KPMG survey, the UK now has the 19th (equal with Sweden) lowest corporate tax rate of the 27 EU member states. And it faces a particularly sharp challenge from EU periphery countries.
With more companies announcing their intentions to relocate their headquarters outside the UK, an incoming Chancellor needs to look not only at the rate itself but how the UK system is able to tax foreign profits.
Lowering the corporate tax rate to 20% with a commitment to drive it down to 15% in future years would encourage business start-ups and expansion, providing a tax revenue stream that would not otherwise be there. The temporary revenue fall could be made good by a temporary rise in indirect taxes. If the Tories mean to get business moving again, this is what they will need to do.
