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Hague: Speech to the Institute of Economic Affairs

I am delighted to take part in today's Conference and to do so under the auspices of the Institute of Economic Affairs, which is one of the most consistent champions of liberal market economics and innovative social thinking in British politics.

A few weeks ago, your Director, John Blundell, was kind enough to send me a copy of one of your latest pamphlets. It is possibly the most radical and far-sighted pamphlet ever published by the IEA. But it is not the contemporary caustic scribblings of one of your young and fiery research fellows. This pamphlet is a reprint of a piece of writing that first appeared 55 years ago - in the Reader's Digest. It is Friedrich Hayek's own abridged aversion of The Road to Serfdom.

In 26 pages and 18 cartoons, it shows how collectivist economics and ever-greater state interference may march under the banner of economic efficiency and social justice, but that they are the true enemies of prosperity and a free society.

Hayek's argument is as relevant now as it was more than half a century ago. Hayek published his ground-breaking work when government spending had soared in our desperate struggle for national survival and the British state took 37 per cent of the nation's income in the form of taxation. This year, even on the Government's own misleading figures, the state will take 37.3 per cent of our national income. What that means is that the state takes as great a share of our national income today as it did in the middle of the Second World War.

The reason is clear. Successive governments extended the responsibilities and power of the state such that by the 1970s, the state was trying to run almost every aspect of national life.

This was known as the ratchet of socialism, until Margaret Thatcher and Keith Joseph came along and showed that, with enough political will, the ratchet could be stopped and then turned back in the other direction.

First under her leadership, and then under John Major's, Conservative Governments succeeded in rolling back the frontiers of the state. We returned industries and utilities to private ownership; hundreds of thousands of council homes were bought by people under our Right to Buy scheme; punitive direct tax rates were greatly reduced; and we achieved what many thought was impossible by halting the relentless increase in the share of our national income taken by the state.

Now, under Labour, the ratchet is turning forward again. It dare not call itself 'socialism' any more and it progresses by stealth; but the effect is the same. For there has been a massive rise in the share of the national income taken by the state in taxation since this Government took office.

Their own figures in the fine print of last month's Pre-Budget show that the tax burden has risen from 35.2 per cent at the time of the election to 37.3 per cent this year, and 37.5 per cent next year. So when Tony Blair told the House of Commons last month that 'the tax burden this year is falling' (Hansard, 1st November 2000), even on his own Government's figures he was telling the complete opposite of the truth. Indeed, the tax burden has risen faster in Britain in the last three years than in any other industrialised country. Strip out the one-off tax revenues generated by North Sea Oil, and we now labour under the highest tax burden in our history - in peacetime or war.

Untangle the fiddled figures, and the tax burden is greater still. If one uses the accounting standards set by the OECD and our own Office of National Statistics, and list the Government's Working Families Tax Credit as a public expenditure increase (which is what it is) rather than as a tax cut (which it is not), then the tax burden under Labour has risen by 2.6 per cent to 37.8 per cent of national income. That amounts to £25 billion worth of extra taxes since Labour came to office.

Of course, tax burdens and total tax increases do not mean very much to most hard-working families. What they are interested in is how much of their weekly budget the taxman takes; how expensive it is to fill the family car; what the cost of the summer holiday is going to be; how much they need to set aside for their retirement; whether their job is secure because the business they work in is making a profit.

Millions of families know that they have been on the receiving end of Gordon Brown's stealth taxes. They can see that taxes have gone up on cars, mortgages, marriages, house buying, cigarettes, alcohol, petrol, diesel, medical insurance, savings, pensions, small businesses, large businesses and the self-employed.

However stealthy the Government has tried to be in the way it has raised taxes, the fact is that in the end they all fall on individuals. And the bottom line is that the typical family can see that they are paying £670 more in tax a year under Labour, and pensioners can see that their pension funds have been taxed and their tax allowances cut. No wonder they feel betrayed and disillusioned, particularly when they can see that the money has been wasted and that there has been no improvement in their local schools or hospital.

The betrayal is most keenly felt among the least well off in our society, who have disproportionately borne the brunt of these indirect stealth taxes. The latest figures show that the fifth of households with the lowest disposable income paying 40 per cent of that income in tax. This is considerably higher than the proportion they paid under the last Government, and considerably more than the proportion now paid by richer households. In other words: the less wealthy you are, the more stealthy they are.

Just as Labour's tax increases have hit all the people in our society, including the least well-off; so a Conservative Party that wishes to reduce tax must show why lower tax is good for all the people in our society. That is what we are going to do.

We are going to explode the myth that tax cuts are only of interest to rich people, and show how everyone in the community benefits from lower taxes. We will explain why lower tax is about more than just the pound in your pocket; it is about the health of the economy we work in, and the health of the society we live in. We will make the moral, as well as the economic case for lower taxes.

I start with the most basic and familiar argument. Conservatives believe that there is nothing wrong or selfish about low taxes that allow people to keep more of what they earn.

It is a central, if unspoken, assumption of the left that the level of taxation is a measure of a society's compassion and that those who want tax cuts are being greedy.

But Conservatives understand that there is nothing greedy or uncompassionate in wanting to pay less tax.

The hard-pressed parent who works long hours to give their children the best start in life, who has to count the pennies because the tight family budget just won't stretch any further, isn't lacking in compassion when they say that there must be room for the state to take away less of that family's income.

The drivers who needs their car to get to work or to do the weekly shopping, or who live in a rural area where there is no public transport alternative, or who have simply worked hard and saved money to own their own car, are not being greedy when they say that it is not right that petrol duties are so high.

Conservatives believe that lower taxes lead to a better-off and a more compassionate society. For less tax means that people have more of their own money to spend in the way that they choose - and it is that choice, whether it be between different types of soap powder or holidays or personal pension plans, that lies at the heart of a free and caring society, and a free market economy. It is that freedom of choice that drives the creation of new business, new jobs, better wages, and economic prosperity. And that is the powerful economic argument for lower taxes.

We cannot be complacent about economic prosperity in Britain. It is not good enough that we have managed to avoid a recession for eight years. We are falling behind the strongest economies in the world. Here are some uncomfortable truths. Under three years of Labour, growth has been lower than the average for the previous fifteen under the last Government. It has grown at about half the rate of the US economy.

Unemployment in Britain has fallen over many years, but it is still higher than in 13 OECD states. Productivity has grown at just over half the rate at which it grew in the previous Parliament. Our share of world exports has dropped. And the savings ratio has slumped.

It is no coincidence that, at the same time, the gap between the British tax burden and the burden in the US has grown to 8.5 per cent of GDP. Or that the gap between the British tax burden and that of euroland economies has shrunk by two thirds since the 1990s. It will shrink still further if France and Germany proceed with their significant tax reduction plans over the coming years.

If we are to improve our competitiveness and productivity, if we are to encourage new jobs to be created in Britain and allow our businesses to succeed, if we are even to try to match the economic performance of the United States, if we are give to the millions of people who go out to work in our economy the best chance to succeed and provide for their families, then we must lower taxes.

And Conservatives particularly believe that lower taxes are good for tomorrow's entrepreneurs.

We live in the age of the new global economy, of e-commerce and the internet. Long distances and national boundaries are an increasing irrelevance. In the old economy, shoppers in Bristol didn't have the time to go looking for better prices in Birmingham. In the new economy, the computer shopper in Bristol neither knows nor cares whether the television they've bought or the holiday they've booked originates in Birmingham, or London, or Chicago or Singapore.

In this new economy, where businesses can locate anywhere in the world, it will be the low-tax, lightly regulated economies that thrive and attract new business. High taxes and heavy regulation of the kind Labour is imposing on our economy will simply drive businesses and jobs away because they simply cannot exist in that uncompetitive climate.

This is not obscure futurology. It is happening now. The technology consultants and software engineers who should be driving Britain's new economy are being driven out of the country by Labour stealth taxes known only as IR35, because they were sneaked out in Inland Revenue Press Release Number 35 on Budget Day.

It is not even clear in the new economy whether Governments will be able to sustain high taxation, even if they are foolish enough to want to. The tax base is already being eroded by new technology. Duties on share dealing and on gambling look increasingly obsolete in the face of Internet competition. Modern travel allows tens of thousands of people every year to avoid alcohol and tobacco duties by shopping in Calais.

But Conservatives also believe in the moral case for lower taxation.

We believe it is morally a good thing that people should be able to keep more of what they earn, instead of being forced to hand it over to the state. We trust people to make better choices than Governments do about how they spend their money. We think that the nanny state and the 'Whitehall knows best' attitude is not just patronising, it diminishes our free society.

For economic freedom goes hand in hand with political and personal freedom, as the old communist dictatorships quickly learnt to their cost. Give people more choice about how they spend the money they earn, and you are giving them more freedom and power over their own lives. Curtail that choice with high rates of taxation and greater state interference, and you are reducing their freedom.

Conservatives also believe lower taxation makes for stronger communities, and helps the most vulnerable in our society.

High taxes weaken communities, because they undermine the diverse plethora of voluntary societies and charities that make up our civil society and buttress our freedom against an over-weaning state. They do this by driving out generous instincts.

The more people are forced to give to the state in compulsory taxes, the less they are inclined to give to voluntary good causes. In America, the state takes about 30% of the national income from its citizens, and its citizens give on average the equivalent of £17 per month to charities and voluntary organisations. In Britain the state takes almost 40% of the national income in tax, and our citizens give on average £7 per month - although this is still more than the average in higher-tax France. Lower tax is not the only cause of the difference in the propensity to give - but it seems almost certain to be amongst the major causes.

There is all the moral difference in the world between being forced to hand over money, and giving it freely and charitably. Moral attitudes lead to moral habits, in this case the inclination to give less voluntarily. A nation made mean by tax becomes, in due course, mean by inclination. The victims of this are the more vulnerable in our society, who are not strong enough to stand on their own two feet, who need the support of the community, who are helped by charities and carers and voluntary groups.

Conservatives believe that lower taxes encourage greater personal responsibility.

High taxes discourage people from taking responsibility for themselves and their families. For example, the Government currently pays for the cost of caring for your widowed and aged mother, as long as she has little savings and few assets. But if she has saved, or if you offer to pay for her, the state will make no contribution and the state will show no mercy. There is no peace for the virtuous.

This has a moral affect too. If people get used to the idea of the state doing all sorts of things for them and their families, then their sense of personal responsibility will be reduced. Expect the state exclusively to look after your elderly mother, and you will soon expect the state to pick up the litter you drop or pay to have your neighbour's flat soundproofed from your own hi-fi.

On top of all these moral arguments against high taxes, Conservatives also believe that lower taxes support a respectful, law-abiding society.

We know from long and painful experience that the state is not very good at delivering services. Go to your local travel agent to book a holiday and you don't expect to be told that there's a waiting list of eighteen months and you can't choose where to go. Go to your local hospital for a replacement hip, and you may well have to wait eighteen months and then have no choice over the hospital or doctor who treats you.

The more the Government takes in taxes, and the more people expect it to do, the more they will become cynical about the ability of the state to deliver anything.

Disrespect for the institutions of the state leads to disrespect for the institutions of society, and that has a moral affect too. Disrespect for the state leads to disrespect for marriage, for church and for school, and with it alienation from the values and traditions of our society.

Instead of responsible citizens, supported by the social institutions in which they are willing and respectful participants, we are in danger of creating a society of individuals looking for ways to avoid the taxman and social responsibility, cynical about the institutions around them, alienated from their own traditions. That is what ever higher taxes leads to.

Conservatives believe high taxes damage prosperity, drive away tomorrow's entrepreneurs, undermine a good conscience, generosity, and a sense of personal responsibility and lead to a deep cynicism about the institutions that give our lives moral shape. Low taxes are not just the basis of a dynamic economy, but also the foundation of a compassionate, responsible and free society.

But there are some voices in the media who say that, regardless of the overwhelming economic and moral arguments for lower taxation, the political consequences of putting forward a low tax platform in Britain are deeply unattractive.

They say that tax cuts belong to the political lexicon of the 1980s; that the political debate has shifted from tax on to spending; and they say that what the Conservative Party should do is engage in a political auction with Labour about who would spend the most.

We heard this argument a great deal earlier this year, when the Government announced their Comprehensive Spending Review. But it could not be more wrong.

I think that the Comprehensive Spending Review will come to be seen as a great strategic mistake by New Labour. For six years, Tony Blair and Gordon Brown had carefully positioned the Labour Party as an apparent convert to low tax and prudent spending. They talked of 10 pence income tax rates, of Corporation Tax cuts, of aspirations to be a tax cutting government. 'We want people to pay lower taxes', Tony Blair said to the City in 1996. Today all he can talk about is how much more they are going to spend. Panicked by their failure to deliver improvements in public services and the anger in their heartlands, they have reverted to the old Labour language of tax and spend.

But people will not accept higher and higher taxes. We saw that in September when local fuel protests turned into a national Taxpayer's Revolt. I see it myself as I travel around the country: the manufacturers I visited in the North West last week, who can see their tight profit margins being eaten by the new Energy Tax; the working people I meet all over Britain who look at their weekly pay packets and can see that support for their mortgages and marriages has disappeared. The hard-working families I come across everywhere who feel more and more strongly that they are paying too much in tax.

Labour is trying to force voters to choose between lower taxes and better public services. But they underestimate the intelligence of the British people. People do want more money spent on crucial public services like health and education. So do I. But they also want this money spent wisely and they believe it is not being spent wisely. They know that there is plenty of scope to save money that is currently being wasted on bureaucracy, bad government and political gimmicks, and that the money saved can be given back to the taxpayers without damaging investment in schools and hospitals. And I believe they are ready in their millions to vote for a political Party that is able to offer them lower taxes and better public services.

That is the great political opportunity that now presents itself to the Conservative Party. But that depends on us being clear about why lower taxes are good for all the people, and confident about how we will deliver lower taxes without damaging our public services. We will do so now. We will start by show where the money is coming from.

The next Conservative Government will restructure the way the state spends money around five basic principles.

These principles are:

First, and most importantly: that the Government should only spend what the nation can afford.

Second, that the Government should not spend more than it needs to do the job.

Third, that the Government should only do what it is necessary for Governments to do.

Fourth, that where it is necessary for the Government to act, it isn't necessary for the Government to provide everything itself.

Fifth, that the Government should encourage personal responsibility and choice.

As Michael Portillo will explain in some detail, more than £5 billion of public expenditure savings flows by applying these principles. In the coming weeks, we will show how a further £3 billion of savings flow from these principles, bringing the total to around £8 billion by the year 2003-4.

These £8 billion of public expenditure savings enables us to plot a course for public spending so that annual increases are within the trend rate of growth of the economy. That means spending what the nation can afford.

Gordon Brown is not doing that at the moment. By increasing government spending at an average of 3.4 per cent over three years when he assumes that the economy will only grow at 2.25 per cent, he is spending more than the nation can afford. That is irresponsible and imprudent. It is the reason why he has had to pile on his stealth taxes. It is the reason that why in the future he will have to raise taxes still further, or else plunge the country into debt.

We saw in the recent by-election campaigns that New Labour is already using every smear and slander available to try to claim that the Tories will destroy vital public services. In West Bromwich, they claimed we would close 10 intensive care beds in the constituency - even though we have explicitly said we will match Labour's NHS spending plans, and even though there weren't 10 intensive care beds in the constituency in the first place.

We cannot allow our democracy to be debased by Labour's scaremongering. We are now ready to respond to their wild allegations with hard facts.

One, the difference between the Conservative spending plans and Labour's spending plans is around £8 billion. Those plans will mean that the nation is spending what it can afford. Whether Labour like it or not, our plans can be achieved while continuing to spend more on necessary public services.

Two, every single pound of our savings will be clearly identified in the way which Michael Portillo will show we have already done today. They will come from specific programmes in specific departments. Everyone will know where the money is coming from.

Three, no savings will come from either the NHS budget or the schools budget. Just so that is clear, let me say that in a different way: the next Conservative Government will match Labour's spending plans on the NHS and schools pound for pound. And because we will take the politicians out of the health service, and give money direct to schools by setting them free from bureaucratic control, we will make sure that our pounds go direct to frontline improvements in our hospitals and education system.

The specific plans to save public money, which we have set out, do not mean cuts in vital public services. But I will tell you what they do mean.

They mean the next Conservative Government will be spending what the nation can afford.

They mean the next Conservative Government will be able to invest more in our schools and our NHS.

And they mean that the next Conservative Government will be able to give that £8 billion or so of savings back to the hard-working people of this country by reducing their taxes. That means the most serious and solid programme of taxation every offered by a political party in Britain.

We have already committed ourselves to reintroduce a Married Couples' Allowance, and we would have cut the duty on petrol and diesel. In the New Year, we will be making further detailed commitments.

So my message to hard-working families who are being squeezed by Labour's stealth taxes is this: you can now be sure that the next Conservative Government will be a tax-cutting Government. We will reduce the nation's tax bill by around £8 billion, and give you back much more of the money you've earned. And we will do this while not cutting a penny from the extra investment in the NHS and our schools.

Our tax promises are not like the wild promises of politicians, because we will tell you exactly where the money is coming from. We have looked at the books, and we have found billions of pounds of government waste and unnecessary spending. There are no stealth taxes, no stealth cuts. We are setting out our figures for everyone to see.

As we reduce tax, we will help hard-working families and the institution of marriage; we will help pensioners and prudent people who save; we will help business and entrepreneurship. Our commitment to lower taxes is part of a Common Sense Revolution that is also about handing power to people and communities, about fighting crime and setting schools free, about rejuvenating our inner cities and protecting our countryside, about being in Europe not run by Europe and keeping the Pound. Lower tax is part of governing for all the people.

So as the choice on crime and Europe and education in the forthcoming election has become clear, so the choice on tax is now clear: between a Labour Party that, despite all the spin and false promises, has reverted to old tax and spend; and a Conservative Government-in-waiting, ready to reduce tax, ready to cut out waste, ready to support our NHS and our schools, ready to govern for all the people.

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