1 June 2019

Will fiscal flexibility save the Conservatives?


It’s time to turn on the taps. That is the conclusion of Neil O’Brien, one of the Conservative Party’s more thoughtful MPs.

In a new report for the think tank Onward, Mr O’Brien – who served as an economic advisor to George Osborne and Theresa May – proposes slackening the fiscal rules to deliver the spending increases and tax cuts he thinks are necessary if both the British economy and the Conservative Party are to succeed.

At present, the Chancellor’s self-imposed fiscal constraints are that the structural deficit should be below two per cent of GDP by 2020/21 and that public sector net debt should fall relative to GDP in 2020/21. There’s also a less firm commitment to ‘return the public finances to balance at the earliest possible date in the next Parliament’.

Mr O’Brien wants to use this year’s Spending Review to replace all that with something simpler: a promise to ‘keep debt to GDP falling gently in normal times’.

Given that the proposal would allow Theresa May’s successor to splash the cash a little, it’s perhaps no surprise that plenty of leadership contenders have sung its praises.

Moreover, when it comes to what to do with the extra headroom, Mr O’Brien has a cleverly balanced set of proposals that feel calibrated to offer something for everyone at a time when senior Conservatives are casting around for ideas.

There’s more money for schools, police and prisons to keep one wing of the party happy, while a proposed package of tax cuts mixes help for low-income households with aggressively pro-growth measures aimed at encouraging the investment that will ultimately solve Britain’s productivity problem. This week, Tom Clougherty argued on CapX that a successful tax-cutting agenda has to unite the ‘economic’ and ‘political’ tax-cutting schools of thought; increasing the National Insurance threshold while cutting taxes on business investment could do exactly that.

Mr O’Brien’s contribution to the conversation about the future of the Conservative Party, and the country, is therefore very welcome. He is a serious man in unserious times. And his emphasis on growth is, as former government adviser Stian Westlake recently lamented, something that was lacking for much of the May era.

Lurking in the shadows of Mr O’Brien’s report is the Leader of the Opposition. Some might think Jeremy Corbyn is fatally wounded by Brexit, but that does not mean Conservatives are any less worried about him, or whoever might replace him. Those Tories who were paying attention in 2017 know that, after so long in office, debates on domestic policy take place on a battlefield tilted in Labour’s favour. Mrs May didn’t help matters by appearing to accept Labour logic on a range of issues.

Relaxing fiscal constraints is one way to level things up. But it is not without risks. Conservatives will never win in a spend-off with Labour; and they should not forget the way in which David Cameron and George Osborne managed to transform spending cuts into something electorally potent.

Any changes to fiscal policy must leave room for the next Conservative leader to draw a sharp distinction between the major parties’ approach to the public finances. And, given the demographic pressures that likely mean existing public spending commitments are unsustainable, Conservatives cannot avoid a deeper conversation about the role of the state.

On public services, the more Conservatives can shift the conversation from ‘how much?’ to ‘how?’, the better. Consider, for example, education. Labour might promise big spending increases, but they propose a dogmatic set of reforms that would wind back the clock and block the creation of exactly the sort of schools that are delivering the best results.

Health is another area where an obsession with funding obscures a more important issue. If productivity growth in the NHS were to match the five most productive years on record then, according to analysis by the Centre for Policy Studies (CapX’s parent organisation), there would be a 73 per cent increase in NHS output without an extra penny being spent.

On the economy more generally, the next Conservative leader will have to go further than tweaking fiscal rules. Away from a conversation about Brexit that gets sillier by the day, Theresa May’s successor must do better than the zero-sum thinking that has been too dominant in recent years. He or she needs to identify the barriers to greater British prosperity and set about dismantling them.

Plummeting in the polls and bogged down by Brexit, the Conservative Party finds itself in a desperately dangerous position. It is easy to forget about the nitty gritty of economic policy at such a time. But abandoning serious thinking about growth is a sure-fire way to seal the party’s fate.

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Oliver Wiseman is Editor of CapX.