If the Tories Want to Cut Taxes, the Only Way Is to Cut State Spending

An Institute for Fiscal Studies briefing note offered ammunition to both sides as this tax war reopened at the party’s conference. The Tories were presiding over “the biggest tax-raising parliament on record”, it said, lifting the tax burden to its highest level since the Second World War. Revenues will jump from 33 per cent to 37 per cent of GDP, or by more than £100 billion extra per year. That’s equivalent to a massive £3,500 tax rise per household since Boris Johnson’s 2019 election win.

Was this scale of private sector austerity really required? The UK hadn’t raised taxes as much as other European Union countries during its 2010s deficit reduction programme, the IFS said, so one could argue we are playing catch-up. We also have massive debts from the pandemic and energy shocks, spiking interest rates after inflation’s surge and growing pressures from baby boomers’ entitlements to NHS, social care and state pension spending. Mix all that together and a higher tax burden sounds like a fait accompli.

These arguments form the battle lines in this intra-Tory dispute. The Trussites want tax relief now, with 33 MPs signing a pledge promising not to vote to increase taxes further. Some demand reversing the recent corporation tax rise and providing more relief to small businesses, in an effort to deliver investment incentives to “Make Britain Grow Again”.

The government says it wants to cut taxes, too, but that inflation and budget pressures make it “virtually impossible” to do so. Jeremy Hunt, the chancellor, teased a Centre for Policy Studies fringe meeting by saying that if he found £5 billion behind the sofa, he’d also prioritise cutting business taxes. In the absence of a windfall, the circumstances preclude him from doing so.

There’s a simple way to reconcile these desires, albeit an unpopular one: restrain government spending. Government expenditure is taxation, in that it requires a rising tax burden to finance it either now or in future. To lower taxes, sustainably, as all sides say they want, therefore logically requires reducing the spending path. Point this out, though, and Tories of all stripes get ashen-faced and start looking at their shoes.

Asked at the CPS event if the state should do less, Hunt declared he was “not about cuts” and would protect “the core public services that they [the public] depend on”. His conference speech ideas to save money were the age-old promises like eking out efficiencies, curbing civil service hiring and toughening work assessments for benefits. All of which will reduce spending marginally but are tiny in the grand scheme of things.

The less cautious tax-cutters, of course, would cut taxes first and see where the chips fall. Tax cuts might boost economic growth so much that revenues rise, they say. Aside from markets’ predictably dim view of such speculation, this argument, though true for certain high taxes at certain times, is wishful thinking for the tax cuts they desire. The likelier result is that additional borrowing would mean higher debt interest payments and higher future taxes.

And herein lies the uncomfortable truth: the Conservatives may say they want a lower tax burden, but all their actions (or, as we economists say, their “revealed preferences”) suggest they do not. When push comes to shove, they increase spending. How else can we reconcile the crocodile tears about how the government would love to be lowering taxes, as it expands childcare subsidies, splurges on infrastructure and rules out reforming the state pension triple-lock?

A tax burden at today’s levels is not inevitable. The Conservatives simply have no appetite for avoiding its inevitability. Perhaps the government will get lucky and its borrowing costs, at present soaring, will fall sharply again. Or maybe Britain will enjoy the rapid fruits of an artificial intelligence boom, fuelling higher living standards and tax receipts. Either could improve the fiscal outlook, facilitating lower taxes.

Yet when it comes to what they can control, the Conservatives haven’t done anything to meaningfully shift the dial. Regulatory reform to deliver more homes, produce cheaper infrastructure or deliver less expensive energy in the pursuit of growth could help. These not only would reduce direct government outlays, the higher resultant living standards would reduce the demand for government, too. To date, the Tories’ regulatory ambitions have been piecemeal.

On public sector productivity, Hunt has handed John Glen, his colleague, the task of undertaking a review. Will the scope of reference include the NHS model itself or rethink the wisdom of huge subsidies for industries such as social care, education or childcare? I doubt it. Yet right now we are socialising the costs of industries inherently difficult to automate, with guaranteed government funding stifling any incentives for the adoption of productivity-enhancing new technologies.

Without rethinking on such a profound level, the only way that Britain could really lower its tax burden enduringly would be by rethinking the state’s functions. Salami-slicing government departments or imposing efficiency drives just isn’t sustainable after the 2010s. Even here, though, can you remember the last time that a prominent Conservative advocated scrapping an entire programme, let alone a department?

It’s not that the Conservatives want to cut taxes significantly, but can’t, or that they could cut taxes, but won’t. It’s that they aren’t interested in cutting spending, which is the only way of delivering the permanent tax cuts that all Conservatives say they want.