David Cameron’s Conservative party conference speech last week seemed to be very smart politics. Certainly, the Prime Minster’s pledged tax cuts electrified the Tory faithful gathered in Birmingham. Conference delegates, having arrived rather downbeat, left their annual party gabfest with renewed confidence the Conservatives could yet win an outright majority at the May 2015 general election.
Many journalists present also rated this as Cameron’s best platform speech since 2005 – when, as a relatively new MP, he transformed himself from rank outsider in the Conservative leadership contest to party-boss-in-waiting. As well as in the conference hall, Cameron’s effort was a hit across the country too. A YouGov poll published on Friday saw the Tories leading for the first time in over two years – posting 35pc support, with Labour on 34pc, UKIP on 14pc and the Liberal Democrats trailing on 6pc, their worst poll showing in over a decade.
The contrast with Ed Miliband’s conference speech the week before – during which the Labour leader “forgot” to talk about the UK’s public finances – could not have been greater. Little wonder YouGov reported Cameron taking a 21-point lead over Miliband on who would make the best Prime Minister – the biggest gap between them since February 2012.
Putting smart politics aside, was Cameron’s oratory smart economics? Yes – on first impressions. The next Conservative government would raise the 40p income tax threshold by over £8,000 to £50,000 by 2020, Cameron pledged, taking almost a million people out of the higher tax band.
The Prime Minister also committed to increasing the personal income tax allowance from £10,000 to £12,500 during the next Parliament, benefiting the entire UK workforce but particularly those at the lower-income end. As someone who supports freedom, enterprise and workers keeping more of what they earn, particularly those on more modest incomes, both these moves are welcome.
Over the days and weeks to come, though, I expect the potency of the new political elixir that is Cameronomics will wear off. For in reality, despite his undoubted oratorical skill, the Prime Minister’s announcements were vague, unadventurous and, above all, didn’t even begin to address the chronic fiscal problems so clearly facing the UK.
For one thing, the eye-catching rise in the top-tax band isn’t particularly significant, given that it will introduced over five years. Assuming the current rate of inflation, the 40p rate, kept at today’s level in real terms, would start at around £47,000 by 2020. That puts the £50,000 pledge in context.
Even if inflation stayed at today’s low rate, then, we’re talking about just a £3,000 rise in the post-inflation threshold by the end of this decade, not the £8,000-plus increase that made the headlines. Inflation could actually be higher in the next Parliament, as the economy hopefully recovers and sterling falls. So the effective give-away could be even less, or rubbed-out altogether. And that’s before you consider that the Prime Minister’s pledge didn’t include top-rate thresholds for national insurance.
What’s really going on is that Cameron is trying to squeeze a huge amount of political capital out of announcing, to much fanfare, a process – the uprating of tax thresholds across the income spectrum – that should happen anyway. It’s outrageous such thresholds are sneakily kept frozen or stalled, so dragging more and more workers into higher tax brackets. How about announcing that adjustments will happen each year automatically, in line with inflation or even average wages? That would do a lot more to encourage enterprise and boost the economy. It would also be more honest.
Talking of clarity, the independent Office for Budget Responsibility estimated, before Cameron’s speech, that real-terms cuts penciled-in for day-to-day spending on public services in 2016 and 2017 need to be twice as fast as those seen since 2011. I heard no mention of such tough decisions to come in the Prime Minister’s speech, nor of the fiscal implications of his tax promises.
To achieve the stated aim of “ending the deficit” by 2018/19, the next Tory government already needed to make £37bn of savings over the first three years of the next Parliament. Now Cameron has just made another £7bn-worth of pledges, such cuts total £44bn.
I’m not complaining about cuts in principle. On the contrary, it strikes me that UK public spending, at around 45pc of national income, is still far too high. Our state sector, for all the good work done, remains inefficient, bloated and essentially bankrupt. The market for UK government debt is propped up with printed money. Had the Bank of England not bought a huge amount of government paper in recent years, so much that it now holds a third of all outstanding gilts, then the British government would have endured a devastating creditor’s strike.
Cameron should be explaining such realities, loud and clear. He should have used his speech to highlight that reducing spending by £44bn amounts to a reduction of 6pc in total government expenditure over 5 years – challenging, but by no means impossible and anyway entirely necessary.
He should have railed against the £52bn the UK government currently pays in debt interest annually – roughly the same as the education budget. And as interest rates rise, that vast sum of dead money, channeled away from front-line public services where it’s needed, can only go up. Such disgraceful realities are barely mentioned in our national discourse. If the Conservatives talked about the cost of debt-financing more, support for getting our national finances under control – rooting out waste and inefficiency, while preserving scare resources for those who truly need and deserve help – would be even stronger.
The Prime Minister should have used last week’s speech not only to announce tax cuts but also to kick-start the really tough debate on where those cuts should fall. This goes against all conventional political wisdom, yet conventional wisdom has delivered pitifully low election turn-outs and a political class that is widely despised. The Scottish referendum, and the emerging and entirely welcome public discussion on European Union membership, shows that the British people, when treated like adults, want to engage deeply in our national debate. So let that debate begin.
I’m not expecting Cameron to say now precisely where the axe will fall. But he should definitely be highlighting the scale of cuts needed – and pledging to fully and openly discuss where we can streamline and improve our over-bearing state in the run-up to next year’s election.
There was much to admire in Cameron’s speech last week. The Prime Minister has leadership qualities. Despite his privileged background, he’s starting to connect with ordinary voters. I agreed when he attacked Labour’s lies about Tory intentions towards the NHS and was moved when he spoke about his late son.
But, as this column has often said, Cameron’s government is living in a fiscal la-la land. The UK’s total tax take has hovered close to 40pc of GDP since the early 1970s. Yet every year bar one, spending has been much higher – an entirely unsustainable state of affairs.
We’ve now had five successive budget deficits in excess of £100bn – and it will soon be six. Yes, the annual deficit has come down a bit as a share of GDP, but it remains vast. Under Cameron’s Tories, the stock of national debt, on which we constantly pay debt service, has doubled to an astonishing £1,400bn. Smart politics, in the end, is less about ephemeral headlines than about leveling with the public and earning their broad respect. On that basis, the Prime Minister’s speech was another missed opportunity.