Is tax-cuts menu a recipe for disaster?

The Tory leadership has been presented with a tax-cuts platter that is not to its taste at all. It all seems far removed, says political editor chris fisher, from the time when a commitment to tax reductions helped Margaret Thatcher to dominate the political landscape.

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When David Cameron and shadow chancellor George Osborne spoke out at the Tory conference against committing themselves to a firm tax-cutting agenda, they knew that their party's tax reform commission was about to say something very different.

It had already been leaked that the commission, chaired by former cabinet minister Lord (Michael) Forsyth, would recommend tax cuts building up to a total of about £21bn a year. And if any serious efforts were made in the past few weeks to get it to change its mind, they failed.

The commission has now published proposals for tax cuts amounting to £29.3bn a year and tax increases adding up to £8.5bn a year. And its recommended changes include scrapping the 10pc starting rate of income tax, reducing the basic rate of the tax to 20pc (from 22pc), cutting the main rate of corporation tax from 30pc to 25pc and eventually 20pc, and abolishing inheritance tax and replacing it with a form of capital gains tax that exempts family homes.

There was the sort of 'damning with faint praise' response from Mr Cameron and Mr Osborne that was to be expected after their speeches at Bournemouth two weeks ago. They said that the commission had offered a menu of options, but also stressed that it didn't constitute party policy.

Further to that, the shadow chancellor declared yesterday: “We are not going to go into the election with unfunded tax cuts. Any tax reductions we offer to families will be offset with tax increases elsewhere, such as in green taxes.”

His main problem with the proposals from the tax commission is the gap of about £21bn between the tax cuts and the tax rises. A secondary one is that the commission has given the government a big target to fire at, and ministers have already started to do so.

Should the gap be closed? Mr Osborne appears to be in no doubt that it has to be. If it were not, public sector borrowing would be liable to rise, and interest rates and inflation would be subject to upward pressure too. That is why Mr Osborne has been talking about putting economic stability first and stressing that he will not “endanger the low mortgage rates and low inflation families depend on”.

So, how can the £21bn be financed? The tax commission is much taken with the hypothesis that the tax cuts would stimulate additional economic activity and that that would produce further revenue for the Exchequer. It thinks that the net tax cuts could be, for that reason, wholly or largely self-financing. But Mr Osborne does not buy this. He argues that no “responsible” chancellor can assume such an effect will happen, and that he has to ensure that “the books balance”.

He would be left with just two options if he were to back the commission's tax cuts.

One of them would be to find additional and compensating tax rises. He is studying ways of imposing additional 'green' taxes that can help save the planet as well as raise revenue. But there is little detail as yet, and the implications - for motorists, for example - of a decision to impose a further £21bn of 'environmentally friendly' taxes could be electorally damaging harmful for the Tories in the short if not the long term.

The other option is that of cutting public spending (or reducing planned increases in it). But Mr Cameron's “the NHS is one of the greatest achievements of the 20th century” speech at Bournemouth strongly suggested that he is up for matching Labour's planned spending on the health service. What about education? There has been no indication of spending cuts there either? But why not?

The government has been shovelling extra 'investment' into the NHS and state education. Do Mr Osborne and Mr Cameron think it has all been well spent? If not, they must suppose there is scope for economies.

But this appears to be almost a taboo subject. Indeed, Mr Cameron has been under some criticism of late in the media for setting out lists of further possible spending commitments. And the prime minister appeared to allude to this on Wednesday when, as he was being grilled in the Commons about post offices, he complained: “He (Mr Cameron) cannot promise to spend more money on the health service, more money on defence, more money on post offices and more money on rural services and then promise tax cuts that simply cannot be affordable”.

After three election defeats on the trot, the Conservatives seem scared and almost paranoid about saying anything that can be quickly turned by the government into claims about 'cuts' in the key public services.

One consequence of that is that the debate now takes place on terrain that Labour is far more comfortable with. Another is that the centre of gravity in the tax and spending debate has shifted from one end to the other. In the Thatcherite heyday a perception of being tax-cutters was a big electoral bonus, and a commitment to huge spending programmes was a millstone at the polls. Now it generally seems to be the other way round.

Not everyone inside the Tory Party sees it that way, however. There are some still some unreconstructed, meat-eating tax-cutters about. One of them in Lord Forsyth. Why was he kept on by Mr Cameron as chairman of the tax commission? Was that a mistake? Or was it a ruse to keep up the morale of the last defenders of the tax-cuts flame?