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Thursday, September 15, 2005
Fixed pie versus bigger pie

In the past week, the main contenders in the Conservative leadership contest have moved beyond sloganising about their commitment to low taxes to reveal the detail behind their economic philosophy.

The contenders can be split in to two camps: fixed pie men versus bigger pie men - a distinction first revealed on The fixed pie men believe that spending restraint must precede any tax cuts, whilst the bigger pie men believe that tax cuts are essential to incentivise the kind of growing economy which supports increased public spending.

The main fixed pie man is Ken Clarke. In a speech at the Cass Business School, Clarke said: "What I do say is that reducing the tax burden can only follow reducing the growth in public expenditure. Tax cuts that are made before public spending control is achieved can only be financed by borrowing and borrowing is merely tax deferred. Conservatives are not in favour of tax cuts because they benefit the better off. We know that low tax economies are the successful economies. All of us benefit from the economic growth that low taxation can stimulate. But we must be honest with people and tell them tax cuts can only come only when they are affordable. And probably the first area for tax relief when we have done the necessary work to make it affordable will need to be pensions and savings rather than cuts in direct personal taxation."

The bigger pie men are David Davis and Liam Fox. In an article in The Scotsman, David Davis wrote: "Britain is one of only three countries in the EU where the tax burden will increase both this year and next. In fact, that burden will soon be at its highest level for 25 years. Other countries have taken a different path and have outperformed the UK as a result. In Australia, for example, the government has increased spending more slowly, run budget surpluses and steadily reduced taxes, lowering the basic rate to 15 per cent and raising the top rate threshold. Since 1996, Australia's economy has expanded by a third, compared to only a quarter in Britain. And just across the water, Ireland's tax-cutting policies have helped them overtake Britain in terms of the amount of GDP generated per head. As a flat tax revolution sweeps around the world, fuelling growth and raising living standards, Mr Brown's only response is to bury the evidence of its benefits and to sweep the idea aside. Contrast this approach with yesterday's intelligent speech on this subject by his Conservative opposite number."

This analysis was echoed by Liam Fox yesterday in a speech to the Centre for Policy Studies: "In the General Election campaign, the debate was merely about how to distribute the cake ather than how to increase the overall size of the cake. That must now change. Conservatives need to take time to explain both the economic and moral cases for reducing taxes. Conservatives must recapture the wealth creation agenda. There has been a lot of discussion recently about the Laffer Curve. It is not complicated really. If you keep all your earnings, the government will get no revenue. If the government tries to take all your earnings, you won't bother to work. The maximal tax yield, therefore, lies somewhere between the two."

Where does David Cameron stand? Writing in today's Daily Telegraph, Cameron argues that the Conservatives "need to explain that reducing taxation over time is not just "nice to have"; it's essential for job creation. That's why George is absolutely right to set up a commission to examine flatter and simpler taxes." However, he has previously been more ambivalent. In a
Daily Telegraph interview in June he said tax cuts should be a long term aspiration rather than an immediate priority. "I would hope that any Conservative government at the end of its time in power will have reduced taxes but if the first thing the Conservative government has to say is tax cuts and the smaller state then we haven’t ‘got it’. If we’re all in it together then we have to have well-funded public services."