Two senior Tories warn of tax rises

POLITICIANS and officials are “kidding” themselves and taxpayers over the true scale of national debt, which in reality puts the Conservatives on course for substantial tax hikes or deep spending cuts, two senior Tories have warned.

In a letter to Philip Hammond, Ken Clarke, the former chancellor, and John Penrose, an ex-Cabinet Office minister, said official figures gave an “over-optimistic picture” of the country’s debt because they excluded billions of pounds in future payments, including on pri- vate finance initiative (PFI) contracts and state and public sector pensions.

They called on the Chancellor to instruct the budget watchdog to publish a full “national balance sheet” at future Budgets. Traditionally, the figures for net public sector debt, currently around £1.8trillion, are largely based on the value of gilts – the bonds issued by the Government to raise money.

The MPs wrote to Mr Hammond last week after he declared in last week’s Spring Statement that Britain was heading for its first sustained drop in debt in 17 years, as well as a falling deficit. His pronouncements were based on new figures issued by the Office for Budget Responsibility (OBR).

In their letter to Mr Hammond, Mr Clarke and Mr Penrose warn: “We are concerned that the Treasury’s traditional focus on gilts as the principal measure of Government debts gives an over-optimistic picture of the true scale of long-term IOUs which taxpayers are committed to paying.”

The MPs acknowledge that the current figures are based on internationally-agreed definitions of “what counts as Government debt” and should not be “abandoned or ignored”. But they warn that the traditional approach is “too nar- row to reflect the true picture”, adding: “No company CFO [chief financial officer] would last long if they only bothered with their firm’s bonds and ignored all their other liabilities completely.”

They add: “Under-reporting or ignoring the problem just means we are kidding ourselves about the scale and depth of the problem which we are bequeathing to future generations of taxpayers. It is neither honest nor fair to let accountancy hide economic reality.

“You or your successors will either have to raise taxes substantially, or cut important public services deeply and none of us, as Conservatives, want to leave such a cold, mean future to our children and grandchildren.”

A new set of figures published in an OBR report last year set out the “overall financial position” under several “more complete scenarios”, all of which were “scary”, the MPs warned.

A Treasury spokesman said: “The Chancellor set out the economic and fiscal position in the Spring Statement. The Government takes a balanced approach to repairing the public finances, reducing debt and investing in our vital public services.”

Ken Clarke and John Penrose are right to ask the Chancellor to come clean about the real size of the national debt. This is a very good time to raise the concern. The Government’s report that the deficit is falling is encouraging even Tory MPs to demand a new spending spree, which would undo the hard work of austerity. Understanding the true scale of Britain’s offbalance sheet liabilities would be a necessary corrective: there is so much more work left to do.

It would be quite wrong, however, to balance the books by even more tax increases. We did not get into this situation by being too generous to the taxpayer: the tax burden is close to the highest level as a share of GDP that we have seen for decades. And the distribution is dangerously unbalanced, with top earners and property buyers accounting a high proportion of receipts and being hit by incentive-killing marginal tax rates. This is not to say only the rich pay tax. Quite the contrary. All income groups are hammered by endless forms of double and triple taxation, much of it stealth.

At the same time, we need to spend more on defence, and the pressures on health and social care will go on rising for decades to come. The long-term solution is reform of the welfare state, to free up new forms of financing that do not distort the economy. It’s time, for instance, to look at how other countries are able to provide better health outcomes – such as Switzerland, Singapore or New Zealand – sometimes at a lower cost, through innovations such as co-payments or insurance models that still allow for universal coverage. We need a national debate to work out which of the many possible reforms we should adopt, but one thing is certain: hiking taxes isn’t the solution.