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Duncan Smith: Labour's tax and spend policy has flopped

Speech to senior company chairmen and business executives in the City of London

Let me begin by thanking you for his invitation to me to address you this evening.

It was clear to me, within five minutes of arriving here, that foremost in all of our minds is the question of the war. When will it come? How will it go? Where will it end? And just to be clear, I am talking about Iraq!

On that subject, I left on Friday for the Gulf, returning just this morning. I went out there to see for myself our state of readiness, and to lend our own encouragement to the brave young British servicemen and women who have taken up their positions in the desert, awaiting their orders.

Iraq was not intended to be the main subject of my address tonight. However, the war, and related security issues, are a critical factor in the general apprehension that presently grips the business community, the country, and indeed economies - and polities - around the world.

And we have now reached a critical point.

So it is important that I make my position perfectly clear.

Saddam Hussein is a tyrant who tortures and murders his own people and poses a threat to the safety and stability of the Middle East.

Of that, I have absolutely no doubt.

And there are few people in Iraq or among its neighbours who will mourn his passing. I know there is widespread concern about the dangers of war, and where they may lead.

But I believe it will be far more dangerous if we do not act now; if we fail to deal resolutely and unhesitatingly with Saddam, once and for all.

If we don't deal with him now, our soldiers will only have to go back - in two, or five, or ten years time - just as it is today, after 12 long years of Saddam's cat-and-mouse game with the UN.

Saddam still holds the power to come clean; to disarm; to pull back from the brink of war, which, as any soldier will always tell you, must always be the last resort.

But he must be left in no doubt that if he does not disarm, after years of terrorism and evasion, after years of unanswered questions - from hidden weapons to missing Kuwaiti prisoners of war - then he will face the consequences.

The reality of the world didn't change on September 11th. We had already seen the signs - the new threats had already made themselves clear. What happened on September 11th is that our understanding of the world caught up with that reality.

So this is now a crucial test. There are things at stake here -- and not just for Britain and the United States -- that go well beyond the outcome of this crisis. There is the credibility of the United Nations and the Security Council as instruments of international security.

There is the future of the Transatlantic relationship - which, given the importance of France and Germany in Europe and their appalling behaviour over the issuing of defence missiles to Turkey - can be said to be at its lowest ebb in 40 years. And there is a burgeoning threat to civilised, democratic values and their preservation and advancement around the world.

This is now our chance to send a very clear message to Saddam and beyond. It is, I repeat, a crucial test. We must be resolute in our determination to disarm Saddam by whatever means prove necessary, or fail it.

I want to turn, now, to our domestic concerns.

Our country faces great challenges at home - challenges which represent real threats to our day-to-day lives, and to our future.

The sooner we can return our attention to these challenges, the better it will be for all of us.

Now you will all be able to guess what I think of this Labour Government. I think this Government is hell bent on a massive programme of tax and spending, regardless of the results.

I think it is obsessed with centralised control - with targets and micro-management. I think it is wasteful - careless with your money. I think this Government is just like Labour Government have been and always will be. There is a continuity of behaviour that no amount of spin can hide.

As a politician I always have to take a moment to get the rhetoric off my chest. But I'm sure you are here for some more thorough analysis.

And in that regard, I want to make two assertions tonight -

The first is this: -

That the Labour Government has gambled its entire economic strategy on an assumption that it can continue to take more and more tax - currently £109 billion more - and that businesses and people can continue to afford it. Moreover, that if it continues to spend more and more money on the public services, they will continue to improve. They have failed and we are now paying the price.

But whereas they believe you should now be paying the price for their failure through higher taxes…

We in the Conservative Party believe - and I think the general public is coming to believe - that Labour should pay the price at the next election -- by being thrown out.

My second assertion is that there is a critical connection between the state of Britain's public services - services which Labour, despite its promises, has utterly failed to improve -- and our ability to compete on the global economic playing field.

As a nation, we are now less competitive and less productive than we were in 1997. Britain must regain the competitive ground it has lost over the past six years - but it can only do so under a Conservative government committed to the reform and improvement of the public services.

So, my first assertion… Labour has gambled on a tax and spend policy, and failed. What does that mean?

Well, for that we can turn to the record.

Labour came to power saying: 'We've no plans to increase tax'. Since 1997 they've raised the national tax bill from £270 billion to £380 billion. Next year, it will rise to £405 billion - a 50 per cent cash terms increase since 1997.

What that means is that in the past five and a half years the price per household for Government services has gone up from £11,000 to £16,500 a year.

Does it feel like we have had a 50 per cent improvement in those services?

This April's tax increase comes in the form of National Insurance contributions - another £4 billion a year from employers, and £4 billion a year on top of that from employees.

It's a straightforward tax on jobs and pay. Gordon Brown may have talked about an increase on National Insurance of just one penny, but the total effect is equivalent to raising the basic rate of income tax by 3p.

In 1997, the Labour manifesto said: 'The level of public spending is no longer the best measure of the effectiveness of government action.' And: 'New Labour will be wise spenders, not big spenders.'

In 2002, the Chancellor committed the government to - in his own words - 'vast increases' in spending over the next few years.

So from this April, as the extra jobs tax kicks in, the Labour Government will break though the 50 MPH barrier.

It will be spending more than £50 million pounds an hour - that's almost 50% faster than the rate of spending in 1997 before they came to power.

On the health service alone, spending will have risen 70% in real terms by the time of the next election.

They have pumped money into the health service in a desperate attempt to show they care, that they are doing something, never mind about the results.

This in spite of a promise by Gordon Brown not 15 months ago that "there will not be one penny more [spent on the Health Service] until we get [the] changes [that] let us make reforms and carry out the modernisation the health service needs".

They hit pensions funds while the market was at its peak and when only so-called 'fat cats' would complain. And because pension funds were apparently in surplus, Gordon Brown had the gall to call it a reform.

But it wasn't a reform, it was a tax, plain and simple. Not only that, but the markets have since gone into reverse with the FTSE falling much further and faster than the Dow Jones.

Private pensions have halved since those heady days - but Mr Brown's still raking off his £5 billion quid. This tax has had two further knock-ons.

First, companies contributing to pension funds have to replace that £5 billion, reducing their profits, and knocking about £80 billion off share values.

Second, removing the dividend tax credit has reduced the relative attractiveness of UK equities compared to bonds and overseas equities.

Unintended as these consequences may have been, they are the product of an arrogant attitude to policy making. And they have made the prospect of retirement a source of fear and anxiety for millions of hard-working people.

This pensions debacle speaks precisely to the reasons which underlie the larger failure of Labour's tax policies.

For a start -- they assumed the great bull market of the late 1990s would run and run and run.

They assumed that as the economy continued to grow, and incomes continued to grow, that they would be able to take more and more money out of British enterprise in tax, and no-one would notice.

And so they took decisions - to tax, to regulate, to spend -- whose consequences they thought would be covered up, or softened up, by a growing economy.

They assumed that instead of putting in the hard work, and making the hard choices, to reform and improve our public services, they could exercise the soft option -- making pledges, announcing targets, introducing schemes, undertaking initiatives.

They assumed that glittering promises and finely-spun excuses would make an effective substitute for hard results.

This has been a fatal misjudgement; policy-making at its most arrogant and most injudicious.

Policy-making, my friends, that has proved wholly unsustainable: Because we know that you cannot spend more and more money - and note that I say spend money and not invest it, - you cannot spend far faster than you are earning, while delivering less and less return on that spending, and not expect to be caught out when the market turns against you.

And now the market has turned. The gamble has failed. A flawed policy, founded in the most basic error, has run aground. The damage is done.

And there is much more damage to come - for businesses, for taxpayers, and for our public services.

Because, at precisely the moment when the economy has just grown at its slowest rate for a decade, and businesses and consumers alike are gripped by uncertainty, the Government - instead of consolidating; reassuring; being a rock of stability - is planning to do precisely the opposite. It is about to embark on a tax and spend experiment of such unprecedented scale that the Health Secretary himself - whose department will most benefit - is known to have grave concerns that the money will be wasted.

And there is every likelihood that this will indeed happen. Good money will be thrown after bad. Because Labour has balked at the hard job of introducing into the public services the efficiencies needed to ensure that they can use the new money to best effect.

You, as businessmen and women, as leaders of British enterprise, will have seen too many disquieting parallels.

Companies which assumed the old and unforgiving rules of economics had somehow been suspended.

Executives who pursued disastrous strategies.

Who re-engineered corporate finances to breaking point - Then when it all snapped, destroyed the wealth of millions of stockholders, and were disgraced and dismissed.

I think it's time we understood this Labour Government in the same way.

They had so much going for them - a golden economic legacy, the vast goodwill of so many in business and among the electorate, two landslide election victories, a massive majority in the Commons.

They have squandered it all.

They have failed to deliver.

They have destroyed wealth, not created it.

Indeed, ironically, it is their very policies that have helped create the malaise that is now catching them out.

At the earliest opportunity, they should be dismissed.

Let me turn now, to my second assertion - that there is a critical connection between the state of Britain's public services - services which Labour, despite their promises, have utterly failed to improve -- and our ability to compete on the global economic playing field.

Let me explain my view of how that connection is made.

In 1997, Britain voted for a change.

It is not my job to tell Britain that it was wrong to make that choice. It is my job to understand why Britain made that choice.

We could understand the lure, for many voters, of more money for schools and hospitals and more support for patients, parents and the lowest earners.

But something deeper was going on. Across the board, people were coming to recognise that being able to compete had to be about more that just economic efficiency.

To compete meant being a country where people wanted to live, where people were optimistic, where businesses would choose to locate their operations.

A place that would attract and retain the best talent and the most investment. A place with something extra to offer.

To compete meant being a nation with a well educated, highly qualified workforce that didn't waste weeks every year, off sick, or stuck in traffic jams.

People had come to understand that the poor quality of our public services was holding us back.

Britain needed better public services, a better quality of life.

For years, we had worked hard to improve our standard of living.

18 years of Conservative Government had yielded a wonderful legacy - we had taken the sick man of Europe and turned it into a wealthy, enterprising and confident nation.

But there was work still to do.

In 1997, the debate was shifting from standard of living to quality of life.

Tony Blair took advantage of this and, on the promise of delivering a better quality of life while not threatening our standard of living, he carried the country on a tidal wave of support.

His use of pledges and slogans was brilliant, and helped him to capture the imagination. But all this did was mask his party's true colours.

So unfortunately, we're now no further on than we were six years ago. In fact, we've fallen further behind.

Britain is a country where people are afraid to fall ill; where their children are not guaranteed a decent education; where our infrastructure - from the transport system to our local communities - is falling apart.

Over a million people are still on hospital waiting lists, waiting for treatment in a health service that now has more administrators than it has beds.

If you need an operation in France, the maximum wait is four weeks. If you need one in Britain, the average wait is 4.3 months.

In Accident and Emergency, NHS patients have to wait hours - first just to be seen, then to be admitted. In Germany, all patients are seen within minutes of arrival.

And all this despite a dramatic increase in resources. Over the last two years, health spending has gone up by 22 per cent. And what did it deliver? A paltry 1.6 per cent increase in hospital treatments, and a half-percent decline in hospital admissions.

Our education system is leaving more and more children behind.

One quarter of 11 years olds leave primary schools unable to read, write and count properly.

30,000 young people leave school each year without a single GCSE. The gap between inner city school and the rest is getting wider.

The failure of our schools to deliver for all is no good for business and no good for society.

As for crime, despite all of Labour's pledges, it keeps getting worse. Gun crime soaring, robbery way up, domestic burglary up, drug offences up.

A crime is now committed every five second in England and Wales.

So Labour's policies have had little impact - the challenge to improve British people's quality of life remains.

But meanwhile, what other competitive advantages we did have are being eroded.

The burden on business is up, and our competitiveness and productivity growth down.

The CBI believes Labour's new regulations alone have added £15 billion to the cost of doing business in Britain.

And since 1997

we've lost over half a million jobs in manufacturing,

we've seen the number of days lost to strikes increased sixfold

and we've fallen from 9th to 16th place in the World Competitiveness rankings.

Over the last year, business investment has fallen at its sharpest rate for more than three decades.

As a global competitor, we have lost a lot of ground.

With taxes up, we're a more expensive place to do business.

With regulation up, we're no longer an easy place to do business.

With our public services in decay, we're no longer a magnet for the world's top talents and skills.

Instead, we have a government that has so completely lost control of its own policies on asylum that Britain has become the destination for a flood of economic migrants - more than 100,000 last year alone, who put further pressure on our straining services and finances.

These are the issues to which a Conservative government will give priority.

What does this mean for business?

First, we are, by nature, a party of lower tax.

It flows from our belief in smaller government, greater individual liberty, and greater personal responsibility.

It flows from our belief that governments should measure success not by how much they spend of your money, but how well - and how carefully - they spend it.

And our belief - also -- that low-tax economies are more efficient, and more competitive, than high-tax economies.

Second, a Conservative Government will not be trying to second-guess everything you do. We will not be over-interfering in the way you run your businesses.

And unlike the Labour Government, we mean what we say when we say that we'll cut red tape, and we'll ask for your advice on how to do it.

Thirdly, on public services we are committed to a strategy of reform, widening choice, and rooting out waste.

Up and down the country, Conservative councils are putting this approach into practice and using people's money more carefully.

What sets us so completely apart from Labour is that we understand how important it is to have a holistic approach. Without strong businesses, you cannot have a strong economy.

Without a strong economy you cannot have strong public services. Without strong public services, you cannot have strong businesses. And without all these things you can't have a strong country. This, I hope, is in our future.

But there is still today to contend with. Indeed, we have two to three years of this Government still to run.

The Chancellor has already badly miscalculated.

His tax and spend gamble has failed. It is clear that more money alone is not the answer to better healthcare. Or to improving any other public service for that matter.

But on the way to finding this out, Mr Brown and Mr Blair have damaged us. Undermined our competitiveness and left us all poorer.

The Chancellor's policy is running into heavy weather. Already holed below the waterline, he now risks steering the country onto the rocks.

It is not too late to change course. Indeed he has a month left to scrap his new tax on pay and jobs. He still has time to admit that his failed policies are damaging the economy - and to recognise that our public services need real reform.

But what concerns me now, and you may share this concern, is that he will not change course in time, and that before someone else gets the chance we will already have run aground.

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