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Portillo: Speech to the Institute of Economic Affairs

William Hague has put forward the powerful economic and moral case for low taxation. He has explained why a Party that is committed to lower taxation will win the support of millions of hard-working families who are suffering under Gordon Brown's stealth taxes. And he has set out the broad principles of public spending that will enable the next Conservative Government to reduce taxes by around £8 billion while establishing a political consensus with our opponents over increased investment in the NHS and our schools.

My job, as the next Chancellor of the Exchequer, will be to apply those principles over the £12,000 of taxpayers' money that the government spends each and every second in order to deliver lower taxes and more money for the things that people really care about, like health and education.

Much work has already been done. Over many months my colleagues in the Shadow Cabinet have been working on plans to reform and improve the role of their departments and, in so doing, they have identified significant spending savings compared to Labour's plans.

Our first, and most important Conservative principle of public spending is that the Government should only spend what the nation can afford.

This is sounds like simple, common sense because it is difficult to imagine any Government being foolish enough to spend more than the nation can afford.

Yet that is precisely what the present Labour Government is doing. Gordon Brown is planning to increase total government spending by around 3.4 per cent a year over the next three years, even though he assumes that the economy will only grow at around 2.25 per cent. That is why he has had to increase taxes at such a rate in this Parliament, and it is why, should Labour be re-elected, he will go on increasing taxes in the next Parliament. Indeed, Andrew Smith has ruled out any tax cuts for five years if Labour are re-elected. As the election approaches, and Gordon Brown's plans come under closer scrutiny, it becomes clear that his reputation for prudence is unraveling.

The next Conservative Government will take a very different, responsible and prudent approach that will allow us both to increase investment in vital public services and greatly reduce taxes.

We will plot a course for public spending towards real annual increases in spending which are within the trend rate of growth of the economy. In other words, we will only spend what the nation can afford.

Our principles on public spending, which I will set out today, will enable us to achieve that. From them already flow over £5 billion of savings by the year 2003-4. We expect that further policy announcements over the next few months will provide several billion pounds more savings.

I expect us to announce, in total, savings on Labour's spending plans of around £8 billion, which we will then give back to the taxpayer by lowering taxes. And because we have specifically identified where the money is coming from, we can reassure the public that we will be able to commit to the large rises in spending on our schools and our NHS planned by the Government.

Our second principle of public spending is that the Government should not spend more than it needs to do the job.

Under Labour, the running costs of government have increased by nearly £2 billion with no improvement in government services to show for it. This is a waste of money. There should be less bureaucracy, not more.

So let's take out the overhead. The next Conservative Government will reverse the increase in the cost of government. New recruits are adding £425 million a year to the civil service pay bill; non-salary costs have increased by 30 per cent since the election. This cannot be justified. As Andrew Lansley announced on Sunday, our administrative budgets will be calculated on the assumption of a freeze in recruitment. Yet a crude freeze may not be the most effective way of reducing costs so we will let the permanent secretaries determine exactly how those savings should be found within their new budget. We will also reduce budgets for non-salary costs.

In total, the next Conservative Government will expect to find at least £1.8 billion worth of savings from the running costs of government by the financial year 2003-4 - an entirely reasonable and overdue reduction in the size of Whitehall.

Very occasionally, some areas of government need more money to do the job, and that is consistent with our principle too. For example, the Home Office needs more spent on immigration and asylum casework, and we will reallocate some of the department's savings in that direction.

The Department of Social Security will need to spend some of its savings on the major new anti-benefit fraud measures we will implement. For all the talk about tackling benefit fraud we have had from Gordon Brown, this Government has completely failed to reduce the amount of fraud in the social security budget. The Government`s own statistical Service have said that Labour`s record in combating fraud is `not statistically significant` and Labour themselves have admitted there is still £7 billion of fraud in the system. Only Conservatives are committed to implementing serious reforms to tackle organised benefit fraud. David Willetts announced plans in February to set up a single Benefits Investigation Squad, a national body which would have responsibility for investigating all forms of welfare fraud administered by the Benefits Agency. We estimate that by implementing our new policies the next Conservative Government will be able to save £1 billion a year by 2003/04.

Running alongside these changes we will ensure that politicians should set an example, because there are far too many of us. The cost of elected politicians in this country has risen by £120 million under Labour, and the cost of political advisers has gone up by £2 million. We'll set out plans to cut the number of ministers, reduce the size of the House of Commons, campaign for a European Parliament of 100 fewer members and halve the number of political advisers to ministers.

There are other things that the Government does not need to spend money on to do the job.

Archie Norman, the Shadow DETR Secretary has drawn up a series of plans to reform the work of his department.

In July and August he announced that there was no reason why the DETR should go on owning those great empty tower blocks on Marsham Street, or the Ordinance Survey, or the Queen Elizabeth Conference Centre in Westminster, and we will put all of these into the private sector.

Regional Development Agencies have, as we predicted, turned out to be a waste of time and money. Of course, some parts of the country do need regional assistance. But Labour has set up a system where every region of the country has an RDA, and they all compete for the same pot of cash. The result is that the help does not go where it is needed most. So we will abolish Regional Development Agencies, streamline the Government Offices of the Regions and the planning inspectorate, and stop in its tracks any plans for regional assemblies.

We also announced at our Party Conference this year that we would free local councils from Labour's hugely costly and bureaucratic 'best value' regime, that has delivered nothing but poor value for local taxpayers by tying up local government officers in red tape and paperwork. In total, all these bureaucratic savings and disposals of unnecessary assets will save the taxpayer £400 million a year by the year 2003-2004.

So our second principle of public spending is that the Government should not spend more than it needs to do the job.

Our third principle is that the Government should only do what it is necessary for Governments to do.

Why is the Government continuing to spend tens of millions of pounds keeping the fiasco of the Millennium Dome open? Governments shouldn't be running theme parks, especially not very good ones.

Similarly, we should not be spending great sums of taxpayers' money on subsidising e-commerce - probably the one sector of industry in the world least in need of state subsidy. As the Shadow Trade & Industry Secretary, David Heathcoat-Amory, announced on 26th November, there are a host of other DTI schemes which do not achieve very much - for example the frittering away of money on advertising the Government's export promotion services and the state trying to act as venture capitalist. We will get rid of them, and instead focus the DTI on what it should be doing: cutting business tax and red tape. From these changes will flow £300 million of savings by the year 2003-4.

Our fourth principle of public spending is that where it is necessary for the Government to act, it isn't necessary for the Government to provide everything itself.

A good example is the costly and ineffective New Deal. Not only does it cost the taxpayer over £20,000 for every job found, but half of those who are helped lose their jobs within nine months. There is a better way. Governments should make sure unemployed people get help finding jobs, but Governments do not need to find those jobs themselves.

As Theresa May announced in July this year, we will replace the New Deal with a scheme called Britain Works, where the Government pays private contractors a fee to find a job for an unemployed person, and then pays them a further success fee if the person stays in the job they've found for them. A similar scheme in America has proved a great success at finding long term employment for people. Not only will unemployed people have a much better chance of finding lasting and worthwhile work, but because Britain Works only costs the taxpayer £3000 per job found, the scheme will save the country £400 million a year by 2003-2004.

Running a job service is not the only thing Governments do not need to do itself. As David Willetts, the Shadow Social Security Secretary argued in December last year, there is no reason why, instead of taxing business to pay for Industrial Injuries Benefit, we should not instead require companies to take out their own commercial insurance to cover against injuries to their employees. Companies would then have a real incentive to improve their safety record. Similarly, huge improvements can be made to the standard of public housing by accelerating the transfer from councils to voluntary housing associations, and in the process remove costly Government schemes such as the arms-length companies and housing PFI arrangements.

Replacing Industrial Injuries Benefit and transferring council homes to housing associations - the principle of which we announced in June - are good things to do in their own right, but they have the added advantage of yielding £450 million of savings by the year 2003-4, and even more in the years after that. They are perfect examples of how you can combine improvements to the services overseen by Government, and save money.

Our fifth principle of public spending is that the Government should encourage personal responsibility and choice.

That is precisely what our Can Work Must Work Guarantee - first announced at the 1999 Conservative Conference - will ensure. The best way to help unemployed and unskilled people is to give them every incentive to find work and, with it, skills and self-esteem. That is why we will require unemployed people who can work, and who are offered a job, to take that job or lose their unemployment benefits.

There are many who are desperate to work but need help. So as David Willetts announced in August this year we will help disabled people back to work by moving towards a single fundholder that would pay incapacity benefit on the basis of the current rules and would also be able to purchase physiotherapy, physical aids and possibly medical treatments directly on behalf of disabled people. This will not only help people with disability find a way into the world of work, but in the process yield modest savings too.

As we announced last November, we will also encourage lone parents whose children are at secondary schools to find work. All the evidence shows that the children of lone parents are much more likely to achieve themselves if their parent provides a role model by having a job. So we will remove unconditional Income Support payments to lone parents whose youngest child is over 11 years old.

Not only will these changes to welfare payments help create a culture of personal responsibility in this country where if you can work, you do work, but we will also save the taxpayer £900 million by the year 2003-4.

Today we have set out five principles which will govern our approach to public spending. Shortly, I will make another speech setting out the disciplines which will govern the Conservative Party's macroeconomic policy.

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