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Howard: Reflections on the election - tax

Speech at the Centre for Policy Studies

The General Election

"Seven weeks ago the Conservative Party suffered its third consecutive General Election defeat.

In terms of seats gained we did make some progress - the first significant Parliamentary advance for 22 years. We won more votes than Labour in England. And if fewer than 15,000 people in 34 seats had voted differently Mr Blair would have lost his majority.

But in terms of share of the vote, we made virtually no progress at all. And far too many voters who did give up on Labour chose not to vote Conservative, but to support other parties - or indeed simply stayed at home.

The Need for a Debate on our Future

That's why I believe - to quote Mr Blair's words in a different context - it is so essential for the Conservative Party to pause and reflect; to reflect on the cause of our defeat and the changes that have to be made if we are to succeed where I failed - in winning the next general election.

As I have said several times since May the fifth I do not believe that one more heave is enough: if we are to serve our country in government again we have to change.

The question is how?

This is a debate that we have not, as a party, had properly for 30 years. After our second election defeat in 1974 we did have exactly that debate. And look at the results: the election of Margaret Thatcher as leader; the publication of The Right Approach; and an election manifesto that paved the way for the transformation of Britain.

Since then we have been preoccupied with the challenges of government and with the demands of the leadership elections that immediately followed our defeats in both 1997 and 2001.

Of course leadership contests are to some extent a debate about the future of the Party. But leadership contests inevitably get caught up in the personalities of the different candidates. And surely very few would argue that leadership contests are the ideal opportunity to pause for reflection?

Nor is it easy to have the kind of discussion I believe is essential once a new leader has been elected. Any expression of heterodoxy at that time would inevitably run the risk of appearing disloyal.

That is why, when I announced my decision to stand down, I was determined not to plunge our Party into an immediate leadership contest.

The debate about the future of our Party is now well and truly underway. We have had some excellent contributions. And the weekly forum meetings of MPs have been unlike any other I have attended in my 22 years in Parliament.

I have thought long and hard about the contribution, if any, which I should make. I don't intend to lay down a prescription for the future.

But it might be helpful if I explain why we did what we did - and what lessons I for one have learnt from the decisions we made.

Offering an explanation is not the same thing as advancing a justification.

I do not claim that all the decisions we made were right. Indeed some of you may think that none of them were.

This is not a speech which is subtitled "How we won the 2005 election" - or even "How we nearly won the 2005 election".

We didn't win - we didn't nearly win. And the responsibility for that failure is mine.

But if we can identify the mistakes that were made and what we might have got right - we will have taken a step forward.

I don't recall this being done by any defeated leader of either main political party in recent times in the immediate aftermath of the election.

But I want to try. Over the next few weeks I will be addressing a range of issues from Conservative values to specific issues like public services. Today I want to start with one of the most contentious issues of our whole election campaign: taxation.

A Belief in Low Taxes

There are few things the Conservative Party likes more than an argument about tax. There is never any shortage of contributions - or ever any shortage of views. So let's start with where we agree.

Most Conservatives believe that families and business are better at spending or investing their cash than politicians. And we want to reward people who work hard and do the right thing - save to buy their home, take care of their family and put money aside for their retirement.

We understand that there is both an economic and a moral case for low taxes.

Low tax economies are the most successful economies - they generate more growth and create more jobs. But you also have a more cohesive society when people pay less tax - because they then have the opportunity to do more not just for themselves but for each other and for their communities.

Most Conservatives believe that people - especially the least well off - are over taxed now. Just consider these two facts.

First, the poorest people in society pay the highest proportion of their income in tax.

And second, thanks to Gordon Brown's tax increases, average household incomes actually fell last year for the first time in a decade. So much for Mr Blair's promise that the "objective of any government is to lower rather than increase the burden of tax on ordinary families".

The point at issue is not really whether Conservatives believe in low taxation - it's hard to find a member of the Party who doesn't in principle. But that is only the starting point.

Conservative Policy

When it comes to tax policy there are, broadly speaking, three camps within the Conservative Party.

On one side there are those, many and vociferous, who believe that tax cuts, preferably large tax cuts, should be at the heart of any Conservative programme. For many it is an article of faith; for some it is THE article of faith.

On the other side, there is a group, smaller but highly articulate, that argues we should make it a badge of honour not to offer any tax cuts at all. This, they say, would show everyone that the Conservative Party really has changed. It would prove that we were putting the public services first. It would surprise people.

And then there is a third group, which accepts the desirability of offering tax cuts, other things being equal.

But they are cautious. They recognise that there is widespread scepticism about Greeks bearing gifts and they are concerned about the read across in voters' minds to the provision of public services. And, as they don't believe in deficit financing, they are reluctant to propose tax cuts without spelling out exactly how they are to be paid for.

I think you can guess which group I come from.

It's not rocket science is it?

But before I say any more about tax I want to say a little about focus groups - some thing that has become almost as controversial within our Party as taxation.

Let's be clear. Focus groups are not there to tell you what to think. As a politician you've got to know what your values are, what you stand for - you've got to have a compass otherwise you risk being blown off course every time a new challenge comes along.

No - focus groups tell you what voters think (pretty important in politics), what they've heard of what you've said (often not very much) and how they perceive you (well you're politicians - so generally not brilliantly).

Nor do focus groups involve the dilution of principle or values. To say that implies voters are fools, which they're certainly not, or that the electorate don't want politicians who are tough, honest and courageous, who govern with principle, which they certainly do.

So what did our research tell us about public attitudes to tax?

People felt taxes had gone up a lot - particularly stealth taxes - and they weren't getting value for money. There was a strong sense that money was being wasted.

People were frightened that they would have to pay more tax, whoever was elected. They believed that hard work was not properly recognised or rewarded in Britain today.

And most people said that they would, in principle, like to pay less tax.

Yet when asked what words they associated with tax cuts - not Conservative tax cuts, just tax cuts - this is what a group of voters (people who had voted Conservative in 1992 but Labour ever since) actually said - their words not mine:

John: "Don't believe it … they'll give with one hand and take it with the other".

Don: "It's just an election promise. They all tell you what you want to hear".

Anne: "None of them keep their word".

John: "Once they are elected, they do what they like".

Derek: "It's obvious. If they cut Income Tax, VAT will go up. They will promise to cut tax and then within a year they will put it up again".

Sam: "Not true; lie; impossible".

Stuart: "That would mean less money for the NHS".

I don't think that we should be particularly surprised that the public are cynical about politicians' promises on tax.

In 1992 we said that Labour would put up taxes if they were elected - and then promptly put up taxes ourselves.

And in 1997 Tony Blair said that he had no plans to increase taxes at all and then increased taxes 66 times.

It is also true that Conservative activists are more enthusiastic about tax cuts than Conservative voters - and that committed Conservative voters are more inclined to support lower taxes than those who are only considering voting Conservative.

A recent YouGov poll for The Daily Telegraph found that 26 per cent of Conservative members felt that the Conservatives lost the election because we "failed to promise large tax cuts" - compared to just 16 per cent of actual Conservative voters.

David James

But despite all this issues we decided to make tax part of our programme because we believed Britain to be over-taxed, and because we believe in lower taxes.

To counter public cynicism we embarked on an exercise the like of which no opposition party has ever done before: an exercise designed to demonstrate exactly how we would pay for our tax cuts.

I asked David James to identify not just government waste, but government activity which was either unnecessary or could be better done by others. The James Report identified £35 billion of savings. These savings were not painless or uncontroversial. They rightly involved some hard choices - like scrapping the New Deal and Strategic Health Authorities.

Labour made numerous attempts to take the Report apart, but they failed. The James Report robustly withstood all the scrutiny to which it was subjected - and for that we owe David and his team an enormous debt. Indeed there have been reports in the press that the Government is now thinking of implementing at least some of our proposals.

Having identified the money we would save, we then had to decide what to do with it.

In some areas our policies required more spending. Defence and the police are obvious examples. And although we were putting forward ambitious plans for fundamental reform of health and education they would cost money, at least in the initial stages.

So, partly for that reason and partly to neutralise the inevitable attack that our tax cuts would involve a slash and burn approach to schools and hospitals we decided to match Labour's spending plans in those areas. We promised that the fruits of any savings we identified in schools and hospitals would be put straight back into schools and hospitals.

All this meant that we had to recycle £23 billion of the £35 billion into more spending.

Borrowing

We decided that £8 billion be used to reduce government borrowing. Although this complicated the argument it was important. It was economically prudent - the right thing to do. And we hoped that it would enable us to highlight Labour's Third Term Tax increases.

Why, you might ask, didn't we give a cast iron pledge not to increase tax at all? We did think about it long and hard - it was a pledge made by the newly elected Danish Government. But I don't believe in making promises you aren't absolutely certain you can keep - and who knows what may lurk round the corner: a war; a recession; some unforeseen crisis.

If we had given such a pledge we would also have been subjected to endless questioning about what this actually meant. Did we simply mean tax rates? What about thresholds? Would the tax burden go up?

Conservative Tax Cuts in 2005

So we were left with £4 billion for tax cuts.

There was no shortage of potential candidates for tax cuts.

I started out with a clear prejudice.

Conservative tax cuts had to say something about our values - about our desire not just to reward people who help themselves, work hard and do the right thing but also our ambition to help the least fortunate in society.

It is quite wrong that people working just 20 hours a week on the minimum wage now have to pay Income Tax and National Insurance Contributions or that a matron working in a London hospital should have to pay top rate Income Tax.

Only a Labour Government could think it fair to introduce a minimum wage and then tax people earning it - or to drag matrons, police inspectors and deputy head teachers into the top rate tax bracket.

So initially I was extremely attracted to an increase in personal allowances for Income Tax and the NIC earnings threshold, along with a rise in the basic rate limit to help those higher up the scale ... until we looked at the practicalities of it.

• A tax cut along these lines - costing nearly £3 billion - would have given the poorest 10 per cent an average change in net weekly income of precisely 7 pence.

• Even the fourth poorest decile would have received less than £1 extra - equivalent to 0.34 per cent of their income.

• In contrast, the richest decile would have received nearly £7 more a week.

The reason, as David Willetts has recently pointed out, is that although the poorest 20 per cent do pay a higher proportion of income in tax than anyone else, this is because of the effects of indirect tax - VAT, and tobacco, alcohol and fuel duties - not direct tax. Few suggest we focus on those taxes.

That is why we looked elsewhere, while still focusing on our values - rewarding people who do the right thing and helping the least well of in society: tax incentives to encourage saving for retirement; help with Stamp Duty for first time buyers; and support for pensioners to relieve the burden of their Council Tax bills.

Timing was also an issue. Do you announce tax cuts before the Budget - giving Gordon Brown the opportunity to neutralise them? Or do you announce them during the campaign - giving you less time to communicate them to the electorate?

I don't pretend to have the answer to these questions, or that there is a right answer. But in the end we decided to announce our £500 Council Tax rebate for the over 65s before the Budget: and our Stamp Duty and savings proposals during the campaign.

The Challenge Ahead

Now let me repeat what I said at the beginning.

The process on which I am engaged this evening is meant to be an explanation rather than a justification. I am not here to claim that we were right.

Indeed many people - from both sides of the debate - would say that we got it wrong. Rather like Churchill's comment about Lord Bossom:

"Bossom? Bossom? Neither one thing nor the other".

On the one side are those who think our tax cuts were too small, too limited and came too late in the day. It is possible that offering larger tax cuts earlier might have been more effective - but the people who shout the loudest aren't necessarily the ones we listen to the most.

And there are those on the other side of the argument who believe that we shouldn't have been offering tax cuts at all. Again it's possible that this would have increased our credibility on the public services - but I believe that people are paying too much tax in Britain today and deserve to be better rewarded for their efforts. Beliefs do matter.

What is certainly true is that Labour's caricature of our position - how can you simultaneously offer tax cuts, less borrowing and more spending? - was effective. Even though we knew that our sums added up, others may have been less certain.

So what are the lessons of all this for the future?

I am certainly not saying that it is impossible for the Conservative Party to win an election on a platform in which deep tax cuts are a central plank.

Apart from anything else the public appetite for tax cutting may well be a good deal greater in 2009 than it is today as Gordon Brown continues to push the burden of taxation up and as business tax rates in other countries fall, eroding Britain's competitiveness still further.

In 2000, 20 out of the 30 major countries of the OECD had a higher corporation tax rate than Britain. Today, just five years later, only 10 do.

But I do think we need to be honest as a Party about the implications of such a strategy.

First of all there would have to be clarity about the budgetary implications.

Would we be proposing tax cuts on the basis of matching spending cuts, lower spending increases or deficit financing?

If based on matching spending cuts or lower spending increases, the difference in spending plans would, in my view, have to be spelled out if it were to be credible.

If the latter we would have to say whether the anticipated budget deficit would be temporary (pending the delayed increased revenues that we would expect to follow the tax cuts as a result of growth in the economy) or permanent? Why? Because, as we have seen elsewhere, budget deficits that are said to be temporary often have a habit of lasting a good deal longer than was predicted.

Second, such a strategy would require a sustained drive to change public attitudes. It would take time (certainly the best part of a Parliament), energy (diminishing the resources available for other pressing areas of policy reforms) and unflinching commitment.

And third, it would be essential that any tax cuts fitted into a broader narrative about the Party. How, for example, would deep tax cuts increase our credibility on public services?

It's often said that Mrs Thatcher won the 1979 election on the back of a pledge to cut taxes.

The 1979 Manifesto certainly did pledge significant cuts in Income Tax. But it did not promise to cut taxes overall. Indeed it specifically promised to shift the burden of tax away from direct tax to indirect taxes. In Mrs Thatcher's first term the tax burden actually rose quite sharply because there was a serious budget deficit.

Given Gordon Brown's propensity to spend and to borrow we might well be facing a very bad fiscal situation at the time of the next election. Four years is a long time - is it really prudent or credible to commit to deep cuts in taxation, or tax cuts at all, this far in advance?

None of this is to say that such an approach would not succeed. It might be a brilliant success. But then again, it might not. So if we choose to embark on it, it would be wise to do so having thought through all the implications.

Conservatism is about more than Tax Cuts

But I do not believe that tax cuts are the silver bullet - the panacea to the Party's problems.

They cannot be all that we stand for - all that defines us.

We need to reach out - we need a broad appeal, a programme that meets the many different challenges we face in modern Britain.

I am a Conservative.

I believe in lower taxes.

But I believe there is more to Conservatism than just tax cuts:

- an intense pride in nationhood;

- an understanding of the fundamental importance of personal responsibility in a civilised society;

- a profound sense of duty to others and to one's community;

- an overwhelming optimism about man's ability to improve the human condition; and

- a belief in free enterprise as the engine of progress.

I believe that the value of a real debate on these questions now, right at the beginning of the Parliament, is hard to exaggerate.

I know that we have so much to offer Britain.

But if we are ever to be given the privilege of serving our country in government again we have much work to do first.

This debate - this period for reflection - should be seen as the start of that exciting journey.

I hope it will take us to the destination we all want to reach."

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