From prudence to penury

Article by Professor Philip Booth published in Parliamentary Monitor, March 2006

In 1997 Gordon Brown needed to reassure the electorate that he would be prudent by promising to implement the Conservative government’s spending plans. George Osborne, with no such need, is in danger of associating himself so closely with the current government’s promises that he will not be able to begin the urgent work of reducing the size of an increasingly voracious state should he become Chancellor of the Exchequer.

It is quite appropriate that the Conservatives concentrate on the problems of the less well off as they try to broaden their support. However, it is a mistake to think that the less well off are somehow a special category of people who benefit from tax and spend and a big state. If they are serious about helping the poor, the Conservatives must be serious about cutting the size of government.

The proportion of national income consumed by government has now increased to the EU average of 45%. The results will be predictable – lower growth and fewer employment opportunities. Also, when public spending rises above about 35% of national income, it is no longer a case of taxing the rich to help the poor: the poor fall into the net of taxation too. Most statistics on levels of tax ignore much of the burden that falls on the poor. A young man with children, working a full year on the minimum wage, will be paying tax at over 40% including taxes on spending and taxes levied on his employer - the cost of which will be ultimately borne by the worker. Should he gain promotion, the same young man will lose over 80 pence of every extra pound he earns through taxes and reduced benefits. Saving is likely to be a waste of time as he will end up as one of the 70% of pensioners caught in the means-tested benefit trap. Sadly, splitting up from the mother of his children is likely to be rewarded by the people who rake in taxes and dish out benefits.

The poor are battered black and blue by the tax and benefit system and the life of a very significant proportion of the population is dominated by its stifling, Byzantine complexity. More sadly still, such people have their opportunities for advancement limited, if not smothered, by the very system that is designed to help them.

If George Osborne becomes Chancellor of the Exchequer he will have a lot of work to do. Pragmatic prudence with a purpose will not be sufficient. Large sums are now raised by taxes that can have no place in a Conservative tax system – stamp duty and inheritance tax to name but two of the most pernicious. As he mentioned in a recent speech to Cass Business School, our corporation tax rates are now far too high. He will also have to take an axe to regulation that stifles entrepreneurship and creativity and moves power from the community to the state – though, if he can defeat the vested interests, this would be a “win, win” policy, reducing costs and increasing growth. But, most of all, he must see that the lives of the poor are not hindered by “big government” whose most obvious manifestation is in its propensity to spend nearly half of every extra pound they earn. To go down in history as the Chancellor that liberated the poor, George Osborne will have to do much more than “share the proceeds of growth” between the hungry state and its long-suffering citizens.