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Letwin: The moral case for lower taxation

Speech to Centre for Policy Studies fringe meeting at Conservative Party Conference in Bournemouth

"I want today to make a simple argument.

The directors of a public limited company have a duty to their shareholders to ensure that the shareholders' money is well spent.

The trustees of a charity have a duty to the people who have donated their hard-earned money, to ensure that the money is well spent.

The government, which is a trustee for the taxpayers of this country, has a duty to taxpayers to ensure that their money is well spent.

Of the three cases, it is the government that has the most solemn duty because - unlike the shareholders who invest voluntarily or the donors who give voluntarily, the taxpayers (unless they choose to leave the country for some less-taxed state) are compelled to pay their taxes under threat of imprisonment.

To take people's money under threat of imprisonment is a serious business. And it gives the government a solemn obligation to ensure that the money is well spent.

The government has an awesome moral responsibility as the trustee of the taxpayer.

When we see that the government is not giving value for money - when we see that there are more civil servants than people in Sheffield, or more bureaucrats in the DWP than soldiers in the British Army, or that the Government is spending £1,000 on an office chair - and when we say, "it's a disgrace", we ought to mean it. It is a disgrace.

If the Government isn't giving taxpayers value for money, that isn't just some passing feature of the scene. It is a moral outrage.

Before I go on to tease out the implications of this argument, I want to draw your attention to some important features of the argument itself.

First, this is a moral argument, and not an economic argument.

There are plenty of good economic arguments against high taxation. We have set some of them out in a paper we have issued this week. High tax economies tend to drive enterprising people and businesses abroad. High tax economies tend to have slower growth rates than low tax economies. High tax economies consequently run the risk of failing to produce the higher absolute levels of social support their proponents seek. In other words, high tax is economically damaging and, can be economically self-defeating.

But that is not my argument today. I am making today a moral argument.

Nor is my argument the only moral argument that could be made. One could argue that high taxes are morally disadvantageous because they drive out voluntary giving, which is morally superior to paying under compulsion. One could argue that high taxes (like excise duties at present) create a moral hazard by driving many otherwise law-abiding people to break the law. But these are not my arguments today. I am making a different kind of moral argument - an argument about the moral obligation of the government as trustee to live up to its trust.

Second, this is not just an argument in the sense of a political debating point - it is a real point about real people and real lives.

Take the example of a small businessman who works for many hours each day to provide things that other people want. By the sweat of his brow he gives people things they want, and they pay him part of what - through their labours - they earn, to purchase from him what he offers. The state steps into these voluntary exchanges, and, under threat of imprisonment, deprives him of a large part of the fruits of his labour. That is a harm done to him. His life is being made less pleasant by an act of coercion. The chance that his children will have the opportunities he wishes to give them is being diminished by an act of coercion.

To justify this harm, it is not enough to wave the hands and talk airily of social goods. The harm done to this man through the act of coercion needs to be justified by showing that the social goods bought by the state with his money are good enough.

To take this man's hard-earned money, and live with our consciences, we need to be confident that we are going to do something really good with it - something good enough to merit making his life less pleasant and reducing the opportunities of his children.

Third, this is an argument about tax and spend, rather than about tax by itself.

This is a point of great significance. It leads us to ask questions which are much too infrequently asked. Instead of regarding public spending as simply a good, we have to ask whether any given level and type of public spending is good enough to fulfil the trust, good enough to outweigh the corresponding tax.

Fourth, this is not - or, at any rate, not directly - a moral argument for a given level of taxation. Rather, it is a moral argument for limiting taxation. The limit lies where the trust is fulfilled - where the value obtained for taxpayers from the money outweighs the harm done by the tax.

What are the implications of this argument for politics in Britain today? Can we, in some simple way, measure the amount of harm done by taxation? Can we measure precisely and effectively the amount of good done by any given level and type of public spending? The answer, of course, is a resounding no.

But the fact that we can't easily measure the quantity of harm done by tax or the quantity of good done by public spending should not make us despair. There is something else we can do. There is another principle that we can derive from the moral argument, which can be applied in practice.

This principle is simple and obvious: when the actions of government are useless or counter-productive, then the public spending used to fund them cannot possibly be doing enough good to fulfil the trust. Useless or counter-productive public spending cannot possibly justify the coercion involved in levying taxes.

Some of our political opponents are inclined to argue that there is no such thing as useless or counter-productive public spending, since all public spending provides, at the least, jobs in the public sector and is therefore doing, at a minimum, some good for the job-holders. But this is a very poor argument, since the tax raised to pay for jobs in the public sector crowds out jobs in the private sector.

Where current budgets are balanced across the cycle, if the only effect of current public spending were to create public sector jobs, then the net effect on employment would be highly unlikely to justify the coercion involved in levying the tax to pay for it. And if the actions of government funded by tax are positively counter-productive - as much of the government's regulatory activity currently is - then the argument for taxes as a means of adding to public sector employment becomes even weaker.

How can we in good conscience explain to the small businessman that we are going forcibly to remove some of the results of his labour and thus make it more difficult for him to employ another employee, if the only purpose of this coercion to employ someone in the public sector to do something counter-productive?

Over the past 7 years, we have seen council tax rise by £10 billion. Over the same period, we have seen an extra £2 billion a year spent on NHS bureaucracy.

Wrong - morally wrong.

Over the past 7 years, we have seen stamp duty rise by £7 billion. Over the same period, we have seen office chairs bought for £1,000 a piece, £100 million frittered away on improper use of Individual Learning Accounts, and £311 million spent on a new Home Office building that is too small to house all the extra bureaucrats hired by the Home Office.

Wrong, morally wrong.

Over the past 7 years, we have seen inheritance tax take twice as much from taxpayers as it did in 1997 - some of it from people inheriting ex council-houses. During the same period we have seen overspends of billions of pounds on defence projects.

Wrong, morally wrong.

I am very glad to see that, for the moment at least, even the present Chancellor - with his great love of public spending, and his record of creating thousands of unnecessary or counter-productive jobs in the public sector - has now recognised that attempts to justify high taxes need to be based on more than job-creation in the public sector.

He is now talking the language of cuts in the civil service - albeit at the same time as he actually increases the number of bureaucrats. The practice, alas, hasn't changed; but the rhetoric has.

This change of rhetoric is the Government's rather typically spin-ridden way of acknowledging that we have now reached a turning-point in political debate in Britain. People are coming to see that there is something morally wrong with taking people's money when all that the money is doing is to pay for unnecessary or counter-productive increases in the size of government.

The public is awakening to the immorality of fat taxes to pay for fat government.

How can a Conservative administration go about thinning down the government to the point where tax levels are morally justified?

Given that we cannot rely on precise measurements of the harm done by tax and of the good done by public spending, we must instead aim at the more restricted good of removing activities of government which cannot be morally justified because they are either unnecessary or counter-productive.

But how can we smoke out the unnecessary and the counter-productive? How can we be sure whether we have correctly identified a particular activity as unnecessary or counter-productive? How can we be sure that in thinning down government, we are not removing activities that are justified because they do enough good to outweigh the harm caused by coercively levying the taxes to pay for them?

These, of course, although in more elegant language, are exactly the questions that Sir Humphrey and his colleagues will ask us. "Oh Minister," they will say, ''it's all very well to make speeches about fat government in opposition; but, in practice, it is all a great deal more difficult; the best may be the enemy of the good; your efforts to reduce unnecessary or counter-productive government activity are thoroughly admirable, but a proper caution must be exercised, lest you find yourself excising items that are valuable, valued and popular.'' This is the Whitehall defence of Whitehall. What are we to do in the face of it?

The answer lies in the title of this speech. To deal with the Whitehall defence, to thin down government effectively, we have to recognise the moral purpose behind our decisions, and we have to judge the risks in the light of that moral purpose.

Let me take a concrete example.

We have so far identified, with the help of the James Committee, a total of some £15 billion of unnecessary or counter-productive activity in the DTI, DEFRA, NHS bureaucracy, the MoD, the DWP, education bureaucracy, and the monitoring of local government by central government.

One of the first steps we will take, if the electorate gives us the chance, is to set about removing all this fat.

We shall be asked, as we do so, "can you be absolutely sure that all of this activity is unnecessary or counter-productive?"

And we shall answer: no one can be absolutely certain of an assertion like that; but we can be absolutely certain that the taxes which otherwise have to be coercively levied to pay for these expenditures are harmful. If we are faced with the certain knowledge that, by removing these levels of bureaucracy, we can reduce that harm, then we have to take the tough decisions to remove fat bureaucracy that looks to us, at best, unnecessary.

Moral life is full of risk.

A moral course can't be steered by the compass of certainty.

Moral action consists of a conscientious effort to limit harm and promote good.

We have to recognise that the effort to limit tax is a moral effort to live up to the trust.

We have to remember that the effort to limit tax is an effort to fulfil the solemn moral obligation that government takes on when it takes people's money.

Only in that way, will we have the moral courage to take the tough decisions inevitably associated with the thinning down of fat government.

I believe in that moral purpose. I believe we owe it to the small businessman deprived of so much of the fruits of his labour. I believe we owe it to the hard-pressed pensioner paying council tax. I believe we owe it to every person in Britain, whose welfare and whose opportunities are being reduced by high, complex and unfair taxes. We owe it to these people to display that moral courage, to take the tough decisions, to thin down fat government.

I go further. For those of us who believe, as I do, that much of present government bureaucracy is unnecessary or positively counter-productive, there is no other decent course open to us. We cannot stand by and watch harmfully high taxes feeding needlessly fat government.

For us, thinning down fat government is not an option; it is a matter of trust - it is a moral necessity."

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