Magazine article The Spectator

What George Osborne Didn't Tell You about the Tories' Radical Economic Agenda

Magazine article The Spectator

What George Osborne Didn't Tell You about the Tories' Radical Economic Agenda

Article excerpt

It was as if the banks were taunting the Conservatives when they arrived into Manchester Piccadilly on Sunday:

the cash machines at the station had run out of money. The queues were snaking around the escalators, and Tory activists could do little. This, of course, is excellent preparation for government in the age of austerity. What to do when money is in such short supply? It's a question that the Conservatives are developing a convincing answer to - but very little of their thinking was revealed in Manchester this week.

This was the iceberg conference: only a small part of Tory policy was allowed to peek above the surface. The emphasis was on the icy water of austerity: telling the country to work longer, public sector workers that they will get no pay rise and those earning more than £50,000 that they will no longer receive means-tested tax credits. But the question that dominated debate in the conference bars - how the Tories are going to cut back the £175 billion deficit - remained conspic-uously unanswered.

There are good reasons why Mr Osborne and his team did not reveal their whole hand in his speech. Partly it was because the Tories fear that every commitment they make to cut spending or raise taxes hands Labour an issue with which it can try and revive itself. Being straight with the elec-torate has its limits; there is little political advantage to be had in saying that nearly all capital spending projects are likely to be delayed or that the strong probability is that the only new roads to be built are going to be toll roads. Alongside these measures, the first Budget will almost certainly increase VAT to 20 per cent - again, hardly a vote winner.

There will also likely be some form of additional tax on banks, something The Spectator called for last week. I under-stand that one change being floated is what would be, in effect, a windfall tax on financial institutions. It would be billed as an accountancy rule: any bank that has received state aid cannot write off old losses against tax. Osborne's office is rightly concerned that banks will try to put their international losses through their London office, with a view to pay-ing no British tax for years or more.

A simple rule outlawing any such manoeuvre - for the banks kept alive by taxpayers, at least - would allow the Exchequer to collect tax at the normal rate. Many banks will protest. But the Tories are every bit as ready for a fight with them as they are with the public sector unions.

As one senior Tory adviser told me, 'real change only comes when you take on the vested interests'.

The size of the black hole in the public finances - £175 billon - is such that even these measures wouldn't make too much of a dent in it. The higher rate of VAT would only bring in not much more than £10 bil-lion. If the Tories were to decide to fill the deficit with a 70:30 split between spending cuts and tax rises (the ratio being discussed by most Conservative-inclined economists) then far more work would need to be done.

But a plan is under consideration that would see Britain start to grow its way out of the fiscal hole it is currently in. …

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