James Forsyth
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To Osborne, who was in charge of the Tories’ general election campaign, the lesson was simple. In government, he had to unwind the processes by which Brown had turned people into Labour voters and create a new model Tory army. In the decisive shadow cabinet meetings that preceded the creation of the coalition, Osborne stressed to colleagues that it was only from government that they could move the centre ground of politics. As he likes to say, ‘in opposition you move to the centre, in government you move the centre’.
In office, Osborne has set about doing this. His first budget was about expanding the private sector and shrinking the public sector. His second has, at its centre, a tax reform that aims to shift the politics of tax and spend to the right.
The Chancellor’s announcement that the government is consulting on how to merge the operation of income tax and National Insurance is motivated by a desire to simplify the tax system and, crucially, to make people more aware of how much tax they actually pay. Osborne has become convinced that the right has to change the terms of debate about spending, to make people aware of just how greedy the state already is. If voters understood that the basic rate of tax is really 32p not 20p, their calculation as to whether or not they would benefit from more state spending would be different. People would begin to realise that the tax burden is at least as painful to them as the effects of spending cuts.
National Insurance is, in reality, a second income tax. The link between what people pay in National Insurance contributions and what they receive in benefits has been steadily eroded over time and will be almost eliminated once the coalition’s universal credit and flat rate pensions are introduced.
But raising National Insurance has little of the political impact that increasing income tax does. This is why Brown put it up in the 2002 budget and Labour was prepared to go into the last election committed to another rise. It was, as Osborne put it during the campaign, Labour’s favourite stealth tax: delivering large amounts of revenue for no expenditure of political capital.
Even Labour insiders were surprised by the fact there was no political cost for increasing National Insurance. One senior figure left Downing Street the night it was agreed, and told a friend that Labour had lost the next election. He was convinced that voters would see raising National Insurance to pay for more spending on the National Health Service as something that violated the spirit — if not the letter — of Labour’s pledge not to increase income tax.
But Brown got away with it. He then used the extra money to fund an investment versus cuts strategy at the next election. By merging the operation of income tax and National Insurance, Osborne would take this option away from any future Labour government. He would also, by highlighting how high direct taxes are, create a pressure for lower taxes.
Most chancellors have been reluctant to merge the two taxes because they don’t want to be blamed for a huge hike in income tax rates. (There are also complications about how to make sure that the new tax does not disproportionately hit pensioners who do not pay National Insurance.) But the calculation for Osborne is different. His challenge at the next election, after the cuts programme, will be resisting demands for more spending to make up for the years of austerity.
By emphasising how high the tax burden is, Osborne would strengthen his case for dismissing those requests. This transparency would also make it easier for the Conservatives to argue that the bulk of the proceeds of growth must go on tax cuts not spending rises.
But all this will be academic if the economy does not start to grow again. The slew of deregulatory measures announced in the budget and the growth review are all designed to catalyse economic growth. Whether they are sufficient to the task remains to be seen. The growth review, led by Osborne and Vince Cable, has made considerable progress in simplifying the planning system and in easing the burden of British regulation on business. But until Brussels is cured of its legislative incontinence, the overall regulatory burden will continue to grow alarmingly.
It is hard to overstate what is at stake over the next four years. If the Osborne deficit reduction programme fails — or is seen to fail — then Thatcherism will come to be seen as a mere interruption in postwar Britain’s steady movement to the left. The next Labour government will expand the state still further and centre-right politics in Britain could be finished. The compromises with the electorate required for victory would, in these circumstances, neuter any future Tory government long before it took office.
But if Osborne succeeds, then the leftwards ratchet can be reversed. Britain can once more be made hospitable territory for the small-state, low-tax right.
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