Cameron's real agenda is truly radical

Allister Heath

LET us hope that David Cameron truly believes in rolling back the failed culture of big government he so aptly described in his keynote address in Manchester yesterday; if he does, a Tory government could yet turn out to be far more revolutionary than most of us have been predicting.

It was a good, though not great, speech – unusually for an occasion of this nature, there wasn’t a single joke – and a fitting end to one of the most important weeks in British politics for a very long time.

There were no fresh policy prescriptions in Cameron’s speech; that wasn’t its purpose, which was to demonstrate his suitability as the next Prime Minister in waiting. But some of his lines were powerful, especially his pledge to help the poorest in society escape from a flawed benefits system which makes it irrational for them to accept low-paid work. “Thirty years ago this party won an election fighting against 98 per cent tax rates on the richest”, Cameron said. “Today I want us to show even more anger about 96 per cent tax rates on the poorest.” It will be tough to reform the system to allow jobless single mums to retain 60 or 70 per cent of any money they could earn – rather than the present miserable four per cent; but Cameron will hire Iain Duncan Smith, one of Britain’s leading experts on the subject, to tackle the crisis.

Yet the most important news from the past week wasn’t what was formally announced: rather, it was the much more radical agenda that we now know the Tories are quietly working on. Some of their plans – it would be premature to call them policies – make sense: they are hoping to identify another £30bn or so in spending cuts. More middle class benefits may be axed; this week’s cutbacks to child tax credits were merely an opening salvo. The Tories now understand that very large changes will be necessary to plug the budget deficit, which could reach up to £200bn this year.

But only 70 per cent of the structural deficit will be met with spending cuts; the remainder will come from tax hikes. Some will be more destructive than others: a windfall tax on banks is the last thing the City needs right now. Value added tax will increase from 17.5 per cent (once the temporary cut to 15 per cent expires) to at least 20 per cent. But at least Vat is less damaging to the economy’s efficiency than direct tax, which is why it is such a shame that some Tories are wondering whether they should hike capital gains tax from 18 per cent to closer to 40 per cent, aligning it with income tax. This would be disastrous as it would slash returns to investors on their capital, acting as a drag on growth. For the sake of what is left of the economy’s competitiveness, this idea needs to be killed off and fast.

The Tories are also considering serious reforms to corporation tax. One option would be to eliminate or curtail the tax deductibility of interest payments, in return for big cuts to the 28 per cent rate headline rate (perhaps all the way down to 12.5 per cent, as in Ireland). The current tax code artificially promotes debt over equity, which makes no sense. But a transition would have to be managed carefully to cushion Britain’s private equity industry.

It was right for David Cameron to avoid getting bogged down in detail yesterday; but at some point the Tories will have to tell us what they really intend to do if they are elected next year.