The early skirmishes of the Tory leadership race have been over tax cuts. But how do we pay for them?
Both candidates seem to have rejected Reagan’s advice to not worry about the deficit, it is big enough to look after itself. Truss and Sunak are both committed to bringing down the deficit and debt over the medium term. Growth will help, but even with growth, tax cuts won’t pay for themselves.
On public spending, the Government has little room for manoeuvre. Conservatives hoping to pay for tax cuts through cuts to welfare will find that politically challenging. The war in Ukraine means that cutting back on defence to pay for public services at home, a favoured choice for governments of all affiliations, does not seem reasonable.
A return to austerity? There is probably no faster way to lose the Red Wall. Before the pandemic, polling found that 72% of voters in the north thought that cuts in public spending had gone too far. A similar number agreed in the Midlands. Even 64% of voters in the south of England thought austerity had gone too far.
So the only viable way to pay for tax cuts is through reforming public services.
Reform must mean restructuring the way that we deliver public services, empowering professionals and creating incentives for innovation. Fortunately, we know how this can be done. One of the most successful policy initiatives of the past decade was encouraging ‘public service mutuals’. These are staff and community-run organisations which were spun out from the public sector and gave people the freedom to try new ways of working.
A great example is Accelerate CIC. Accelerate was created by a group of nurses in East London who wanted to transform wound and lymphoedema care. Wound care alone costs the NHS over £8bn a year and Accelerate wanted to find ways to improve patients’ wellbeing and use resources more efficiently. Using new techniques and engaging with patients, they were able to cut expenditure per head of the population for wound dressing in Tower Hamlets by a third between 2012 and 2021. If Accelerate had not been independent, this kind of transformation would not have been possible. This is not just an isolated example. Research on public service mutuals found that their productivity growth was 4.5 times higher than the rest of the public sector between 2012 and 2019. If the whole public sector matched the productivity of these mutuals, it would free up £18bn a year – equivalent to 3p off income tax.
Alongside bringing more mutuals and social enterprises into public service delivery, we need to give more power to communities. The Wigan Deal is an example that we can build on. The Deal saw an agreement between local residents and the council to work in partnership and use the assets, skills and networks of local residents to improve services. The Deal has seen £115m in savings over the past decade. Taking health and social care as an example, the King’s Fund found life expectancy in Wigan was rising, bucking the national trend for stagnation, and high quality social care. Wigan has also even managed something unique, to run a surplus on its social care budget.
Wigan is not alone, there are many other examples of how giving money and power to communities delivers better results. A study by Ernst & Young in January 2013 found that place-based budgets, which pool together local public service funding in an area around shared objectives and allow for more flexibility on how money is spent on different agencies, could save up to £20bn over a five-year period based on pilots taking place around the country. There are plenty of areas where public services can be reformed if the government is prepared to do it. Truss and Sunak’s leadership teams would do well to read the pamphlet Trusting The People written by a group of 2019 intake Conservative MPs last year, which called for a new ‘community-powered conservativism’.
The next PM can also make an impact on day one through changing the Procurement Bill. The state spends over £300bn on procurement with external suppliers but research from a new programme, Social Value 2032, has found that up to £56bn in additional economic, social and environmental value is being unclaimed by not spreading best practice around the country. Getting the most out of procurement would be equivalent to 14 levelling up funds, creating tens of thousands of new jobs and improving community assets. Changing the Procurement Bill to create a duty for all public bodies to maximise social value would cost nothing and could have an impact before the next election.
The next Conservative leader needs to tap into the party’s reforming instincts. It may not make for catchy slogans, but without it the promise of low taxes and high quality public services is something the party will never be able to deliver.
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