Less state spending

... and lower supply-side taxes on companies

There’s no money left. That was the message that Liam Byrne, chief secretary to the Treasury under Gordon Brown, left to the incoming Tory government in 2010, a missive the Labour politician regretted bitterly. There was no such memo from George Osborne, the former chancellor, to his successor, Philip Hammond, but there might well have been.

The deficit was far too high for comfort when he left 11 Downing Street, and will serve as the political equivalent of a time bomb for the May government. Osborne’s great mission was to get rid of the deficit and start taking down the national debt as a share of GDP: sadly, it ended in failure. Hammond’s task is different: he needs to navigate Brexit, one of the greatest public policy challenges since the Second World War. But he too needs ultimately to sort out our public finances: economies require robust, resilient foundations, or else they become far too vulnerable to downturns or crises.

This is not to say that all of Osborne’s endeavours failed: he was hugely successful in reducing publicsector employment as a share of the total workforce, for example. State employment peaked at 6.37m in September 2009 and is now just 5.33m, down by 16.2pc. Some of this was caused by reclassifications but most of it was real. This was hugely important in economic as well as political terms: a smaller public sector supply-side is good for productivity and ensures that resources are better allocated. It is also good for the Tories: private-sector workers are their natural bedrock, and anything that grows that constituency while shrinking the Left’s own pool of support will eventually pay dividends.

But time and again Osborne failed to cut fast and deep enough, was too tactical and insufficiently strategic and didn’t rebuild the welfare state from the bottom. He shielded too many groups and sectors from his spending reductions, which meant that the axe fell on fewer areas or categories of recipients, making them too difficult to follow through. Hence his U-turns and his attempts at over-compensating in other ways, including his jobdestroying disastrous plan to increase the minimum wage too fast.

There was already little hope of Osborne meeting his deficit reduction targets when he first set them out; there was no hope at all following Osborne’s many U-turns earlier this year. The new Government has only been in power since July: while it is technically responsible for September’s poor public finances numbers, it cannot really be blamed for them.

We are now halfway through the financial year and the situation is grim. The deficit was £10.6bn in September, higher than last year. Tax receipts have underperformed so far this year, and are £14bn lower on an annualised basis than the Office for Budget Responsibility expected in March, according to the Institute for Fiscal Studies. Spending has come in slightly below what was expected, which is better news. For the year-to-date, corporation tax receipts are up 3.5pc, less than hoped for; but this is a volatile and choppy series, and the Government will be hoping that the end number comes in much higher, despite (or because) the tax rate has fallen so much.

The IFS suggests that the hike in income tax on dividend income led to some owner-managers bringing forward dividend payments. The selfassessment deadline at the end of January is therefore likely to yield positive news, and the IFS expects the gap in receipts versus expectations to fall to £8bn for the year as a whole. It sees income tax, national insurance and Vat as areas of relative weakness.

Given all of this, what should the Chancellor do at his Autumn Statement? He needs to tighten his grip further on current spending: there needs to be more cuts. He should feel free to speed up some infrastructure projects: building more roads more quickly is fine. The net effect should be to increase the deficit by no more than a few billion, at a stretch, and perhaps much less. It all needs to be part of a new multi-year spending plan which aims to balance the budget as soon as possible but which also allows for another change: supply-side tax cuts.

It is vital for the Government to take an axe at those taxes that are doing most to restrict, prevent or stultify economic activity. These include stamp duty, which is one reason why transactions keep falling in the housing market. The Government has no money to waste, and needs to spend less on day-to-day expenditure. But it must also rediscover the supplyside roots that made the Tories great. allister.heath@telegraph.co.uk

‘It is vital the Government takes an axe at those taxes that restricting activity’