The Modernisers’ Mistake

Why, with UK growth picking up faster than anyone predicted, isn’t Labour collapsing in the polls? Why does Labour win approval for policies that are clearly incompatible with running a successful free market economy? And what should the Conservatives do about it? The Chancellor, as he prepares his Budget, would be well advised to reflect on more than the Treasury forecast or ephemeral party polling data as he seeks an answer.

The first step is to take the Labour Party seriously. That isn’t easy, for Labour have simply turned their backs on economic rationality. Tony Blair’s last remaining claim to significance is that he persuaded his party to be pragmatic — to abandon socialism and accept capitalism. “What counts is what works,” Blair told them. But today’s Labour leadership doesn’t mind what works, and it clearly can’t count. This should be bad news for Ed Miliband. So far, though, it has not been. But it is certainly bad news for Britain and, if it would only stop and think for a minute, pretty bad news for today’s Conservative Party too.
Party politics is often fun, but never a one-set match. Politicians who make a difference understand that. Keith Joseph and, under his influence, Margaret Thatcher, at least in her more irenic moods, believed that to make the free economy safe the Opposition would have to be converted to its merits. They also grasped that this meant educating the wider public in the economic facts of life. Otherwise Labour would revert. Joseph and Thatcher knew they had a mission. They had not just to win elections but to win arguments — above all, the arguments for choice, markets, incentives, property and the rule of law. Their immediate successors ignored that duty, which they considered otiose and old-fashioned. Today, the Tories are paying the price. Messrs Cameron and Osborne have deserved no better. The modernisers’ default setting is of apology for the 1980s. So they have defended and cosseted the last of the nationalised monopolies, the unreformable NHS. They reneged on their commitment to cut inheritance tax. They led a frenzy of attacks on bankers and big business. They revelled in higher imposts on the middle class. They refused to argue the case for capitalism. Is it a wonder that public opinion has moved so sharply back to socialism?
A whole flock of chickens have now come home to roost. Last September, Mr Miliband pledged to freeze energy bills for 20 months, whatever the cost to the Exchequer and whatever the market price of energy. It was wildly irresponsible. Conservatives gloated. Right-wing tabloids raged. And the policy proved fantastically popular. Polls showed 80 per cent of the population loved it. The same is now true of squeeze-the-rich tax rates. Ed Balls’s pledge to restore the 50 per cent top rate of income tax caused havoc in the City but it went down remarkably well in the country. Sixty per cent of those polled were in favour, including (astonishingly) a majority of Conservative supporters. High taxation makes societies poorer. The world’s most successful economies, other things being equal, have low tax rates. High marginal taxes on the rich are especially damaging. It is easier for the rich to dodge tax, by accountancy, inactivity, or simply leaving the jurisdiction. So cutting their tax rates should always be an attractive option for a Tory Chancellor. George Osborne could do worse, with some of his increased tax revenue, than to bring the top rate back down to 40 per cent and to lift the threshold. It might cost nothing at all. Under Mrs Thatcher, Nigel Lawson’s 1988 Budget cut the top rate of income tax from 60 to 40 per cent (as well as the basic rate from 27 to 25 per cent). The result was not just a boost to growth and to the Exchequer: the share of income tax paid by the richest 1 per cent rose from 14 to 21 per cent. It now stands at over 27 per cent. Cutting the rate increased revenue then. Cutting the rate again makes sense.
The lessons from America are clearer still. In the 1980s, the Reagan administration systematically cut income tax across the board. Yes, the deficit grew. But that was because spending stayed too high. And yes, the rich grew richer. But so did others. The sweeping marginal tax cuts worked. The US economy grew by a third. The revenue from income tax grew by a quarter. And the share of that income tax paid by the richest 1 per cent rose from 18 to 28 per cent. 
So Labour’s plans fly in the face of experience. They are madhouse economics. But, at present, they are also shrewd politics. That is because they appeal to national envy and ignorance — neither of which the Coalition has so far dared to challenge. It is time to make a start. People need not like the rich, any more than they need to like George Osborne. But they must be told why both are needed.

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