This Tory leadership contest is a carnival of fiscal folly

The Conservative Party’s leadership contest was never going to be a pretty sight, as some of the ten candidates in the race to become the next prime minister parade their determination to yank Britain out of the EU whatever the economic cost, while others proclaim their ability to secure a better deal than Theresa May. But it has got off to a particularly ugly start by revealing the poverty of Tory economic thinking beyond Brexit. The only thing that appears to unite the leading candidates is their readiness to pledge unfunded tax cuts or spending increases, in a race-to-the-bottom to win favour with the party members, who pick the leader from a short-list of two selected by Tory MPs.

Dominic Raab has been doubly irresponsible in his promises, threatening to prorogue parliament in order to push through a no-deal Brexit while showering taxpayers with a 5p cut in the basic rate of income tax. Missing is any mention of the £28bn hole this would dig in the Treasury’s books (according to HMRC’s ready reckoner, the long-run effect of cutting the basic rate, currently 20p in the pound, by 1p is £5.6bn a year). The former Brexit secretary also wants to lift the national insurance threshold to help low earners, which he highlighted at his campaign launch on 10^th June. A nice thought but again an expensive one.

Jeremy Hunt poses as the “serious” candidate, vaunting his capacity to secure a new deal with the EU. The foreign secretary may be more reasonable than some of the other candidates in striving to avoid a no-deal Brexit but he appears to be just as cavalier with the public finances. He wants to bring down the corporate-tax rate, currently 19 per cent, beyond a further reduction to 17 per cent already scheduled for next year, to a goal of 12.5 per cent. The long-run cost of bringing the rate down by just one percentage point is £3bn a year. Hunt also advocates a dramatic boost to defence spending as a share of GDP, currently 2 per cent, which would cost £20bn a year for every extra percentage point.

Michael Gove has received unwelcome publicity for his admission about using cocaine two decades ago. At least that diverted attention from the environment secretary’s extraordinary plan to do away with VAT, which was introduced in 1973 when Britain joined the European Economic Community, and to replace it with a supposedly lower sales tax. In keeping with the spirit of gobackery that infuses Brexit, this would turn the clock back on a tax invented in France in 1954 and adopted in 168 countries by the end of last year. Among the 36-strong OECD club of mainly advanced economies only the United States has not brought in VAT.

Gove’s retrograde proposal makes you wonder why economists bother wrestling with knotty issues such as how best to levy taxes. In 2011, the Institute for Fiscal Studies published “Tax by Design,” the fruits of a lengthy review chaired by the recently deceased James Mirrlees, who won the Nobel prize for his work on optimal taxation. The overall assessment of VAT was that despite its administrative complexity it was “on the whole, well-designed” and had proved to be “an exceptionally successful form of taxation.”

Front-runner Boris Johnson offers the time-worn Tory prescription of income tax cuts, which he would controversially direct to higher-rate taxpayers. The threshold at which tax is paid at 40p in the pound, which has already risen sharply since April 2017, would jump from £50,000 to £80,000. Although the employee national-insurance threshold would also rise, that would still mean an overall tax rate of 32 per cent rather than 42 per cent on that band of income.

Johnson’s proposal immediately rankled in Scotland since better-off Scots would have to pay the higher NI rate, set across the UK, but would not get the benefit of paying less in income tax, which is now set by the Scottish parliament. If the idea is to improve work incentives the plan could scarcely be more misconceived since the group gaining the most from the giveaway would be affluent retirees, who do not pay NI. The pledge, costing around £10bn, looks like an attempt to woo the ageing Tory party members who will have the final say. If so, it is misjudged since according to Tim Bale of Queen Mary, University of London, who has researched the make-up of Conservative Party members, less than half of them have incomes above £50,000 a year.

In various ways all the leading candidates have their eye on Philip Hammond’s stash of £26.6bn potentially available for giveaways. But that amount is supposed to be a “deal dividend,” which the chancellor of the exchequer is withholding until Britain leaves the EU with an arrangement ensuring a semblance of economic stability over the next year or so. If, on the other hand, there is an abrupt exit without a deal, the economy would nosedive. Any fiscal support then would be an emergency package to prop up activity. The lasting damage to the public finances from the harm inflicted on the economy would eventually require a further instalment of austerity.

The Tory obsession with tax cuts is a moth-eaten attempt to resuscitate the glory days of the Thatcher era. There was a case in the 1980s for getting rid of high marginal income tax rates. But the priority now is to rebuild public services after a decade of cuts that have gone too far. In or out of the EU, Britain needs to become a more skilled nation, which requires putting more resources into cash-starved vocational education. A viable system of social care requires more funding, too. Rebuilding the public infrastructure will soak up yet more money. The list of urgent calls on the public purse is long, reflecting past policy failures and the lack of any progress in the past three years benighted by Brexit.

Though there are some honourable exceptions among the Tory candidates such as International Development Secretary Rory Stewart, the readiness of so many of them to play fast and loose with the public finances is disquieting. The referendum vote to leave the EU has already weakened the economy, which is 2 per cent smaller than would have been the case if Britain had backed staying the EU three years ago. Business is struggling in a fog of uncertainty. It says much about the degraded state of the Conservative Party that against this background the leading candidates to become prime minister are dishing up the discredited remedy of giveaways. Bereft of good sense, the Tories are jettisoning their fiscal credibility.