A Conservative Economic Policy

1. There is a basic philosophical divide between Conservatives and Labour, which has survived Labour’s transition to ‘new’ Labour. The Conservatives believe in lowering taxes when it is prudent to do so, and conducting the rest of their economic & social policy in such a way as to enable this to happen. ‘New’ Labour believe in increasing public spending when it is prudent to do so. This division has emerged again, only this week in the debate about how to finance the NHS: encourage private spending on health care versus increasing public spending.

2. We have yet to rediscover a way of making our approach a popular rallying cry. The call for more freedom and more choice starts to bite when bureaucratic interference and public sector incompetence reaches a certain pitch, as it had by the late 1970s. But the Thatcherite reforms lanced the boil and Labour’s backsliding (to mix the metaphor) has so far only been moderate. So preaching our message, though necessary, may not earn electoral dividends in the short-run. In fact the temptation is in the opposite direction: to yield to the complaints of ‘underfunding’ by promising to spend more than Labour.

3. Let me briefly go through the different elements of economic policy, trying to identify a reputable Conservative position. I start with macroeconomic policy. Here there is really not that much to criticise. In his Mais lecture of November last year. Gordon Brown committed himself to a ‘platform of economic stability built around explicit objectives for low and stable inflation and sound public finances’. There’s not much wrong with that, and I think there have been institutional improvements since Ken Clarke’s day: operational independence for the Bank, the Golden Rule for fiscal policy. Macro-policy is virtually on autopilot. I would query the usefulness of the capital/current account distinction for the public sector. Why, under modern conditions, have a positive PSBR at all? Schools, hospitals, houses, roads can all be built by the private sector, with the government servicing the debt. If the tenders are properly auctioned, private sector contractors should be able to borrow as cheaply as the government. The advantage would be cost saving, and less scope for the government to fiddle the figures. There is also a clear case for an independent audit of fiscal policies –such as Andrew Tyrie proposed some years back, and which Francis Maude, I think, is inclined to accept.

4. The big differences between the two parties emerge at the level of micro-policy. Labour interference with the economy has been displaced from the macro to the micro level. After the last budget one correspondent wrote in the Independent: ‘Mr. Brown wants a stable economy so that he can spend his time doing what he really likes: tinkering with the tax system’. This involves giving concessions and presents to favoured groups; or as Anatole Kaletsky put it in The Times: ‘Taken together they [the budget measures] seem to represent a covert triumph for the traditions of interventionist economic meddling and social engineering that appeared to be buried with old Labour’.

5. The Conservatives should stand, above all, for a tax system which is coherent, neutral and as simple as possible. They should resist the temptation to offer tax concessions to favoured groups –even to get them to do things which we, as Conservatives, would like them to do. That is why I am against tax concessions to encourage people to take out private health insurance, etc. Politically this is attractive; and it probably wouldn’t be a net cost. But it would distort behaviour, leading to a welfare loss; and it would send out the signal that the budget is being used for social engineering. If we use fiscal policy to help our friends, we can’t attack Labour for using fiscal policy to help theirs. At a deeper level, we can’t honestly attack Labour for using fiscal policy to get people to do what they want them to do, if we use it for the same purposes ourselves. So the next Conservative Chancellor should continue with Nigel Lawson’s policy of simplifying the tax system, eliminating concessions, and, whenever possible, cutting taxes across the board. I am very pleased that Mr. Hague promised that the next Conservative government would reduce the tax burden over its period of office. I have argued for a long time for a pledge of this kind. I think there is still something to be said for putting up a target, to concentrate the mind. But I recognise that there are arguments against this.

6. I said at the outset that a tax cutting strategy must needs give shape to social policy or else it will be aborted. The big spenders here are health-care, education, social security, and pensions. All present extremely complex problems. Generalities are cheap, workable schemes for state retrenchment hard to come by, both conceptually and administratively. But we must try, or else we will drift. Let me say a word about health-care and education. These are the most difficult nuts to crack. Pension reform is not politically that contentious, and both parties have been keen to cut social security bills. .

7. NHS. We all recognise that the NHS is underfunded. This can be put another, more helpful way. We spend less as a community on health care than the community wants to spend –about 2-3% less of GDP than comparable countries. There is no evidence that we are more negligent of our health than they are. So the question is: how has this situation arisen?

8. The answer must lie in the institutional methods we have adopted for delivering health care. Practically all health care is provided through the tax system, being free at point of use. The private health sector accounts for less than 10% of health spending. The obvious first answer to the question is that people don’t regard £1 given in extra taxes as equivalent to a £1 spent out of their own budgets. Why? Because in the former case there is no direct link between contribution and benefit. People don’t know where the money is going and they suspect that it is being redistributed away from them to the groups who pay no direct taxes. The first problem might be alleviated to some extent by earmarking, which Labour is now considering: they may raise a health tax to fund the NHS properly, just as the Liberals have long advocated a special education tax. But it still goes into a huge pot, with little link between the extra being raised and individual benefit. So any such policy is simply a disguised way of raising taxes in general.

9. The next question is: why isn’t there a greater take-up of private medicine? The answer that only a small fraction of the population can afford it must be bogus. Our tax burden is not heavier (in fact it is lighter) than on the Continent, where the private health market is larger; also people pay compulsory insurance on top of their taxes. I think there are two main answers: first, people feel they are already paying their taxes for the NHS so why should they pay twice. There seems to be a psychological difference between paying for something through a combination of compulsory and voluntary insurance and a combination of tax and voluntary payments. Secondly, I do believe that the insurance products on the market here are peculiarly inflexible, and even unattractive. Till recently the private health insurance market was, in effect, a cartel. Now there is more competition, but not nearly enough variety of instruments, offering differently priced packages of benefits. You might call this a failure of entrepreneurship, conditioned by the feeling that the NHS must always be the primary source of health care for most people.The private sector is also greatly over-regulated in order to put a ceiling on risk. This too probably makes it impossible to design decent insurance instruments.

10. Many of the same puzzles arise in education. Conservative educational policy has long been in a mess. A Conservative party must favour a decentralised education service driven by parental and local choice. This requires a substantial element of co-payment to be effective. Yet our party has been diverted from this line of thought by the perceived need to ‘raise standards’ quickly. We now attack the Labour government for excessive centralisation. Yet we started the process, and Labour is only turning the screw a bit tighter. Centralised uniform provision is inconsistent with variety and choice, and indeed any parental contribution to the cost of education, except as taxpayers.

11. Yet the evidence is that the centralizing policy is reasonably popular. Partly this is because the previous decentralised system reflected not parental wishes but local political control, leading to a massive divergence between the tastes of political activists and parental preferences. Centralization was seen (and sold) as a way of neutralising the ‘loony’ left. But centralization is not the only answer to badly-designed decentralisation. Nor have any of the academic alternatives to centralization really got off the ground, except the half-baked nursery voucher scheme initiated by the last government. A generalised policy of vouchers to increase educational choice encounters large electoral resistance. Charging university students tuition fees is also unpopular, not just with the students. It is met with the illogical cry that it penalises the poor students In fact, freeing educational institutions, both universities and schools, to charge fees, coupled with ‘weighted’ vouchers for poor students is by far the best way to help the poor and raise standards at the same time. The resistance to it comes from the middle classes, as Keith Joseph found it out in the early 1980s. Nevertheless, a coalition could probably be formed behind a properly-designed choice-based, decentralised system aimed at the poor & religious and ethical minorities. But we have hardly begun to think along these lines. In education, too, there are large failures in the private market for education. Our private sector is much smaller than even in most parts of Europe, certainly than in the USA, Australia, and most of the rest of the world. The reason is the lack of cheap private schools. It is not just a failure of entrepreneurship: there are also legislative barriers to entry erected by successive governments, and which the last Conservative government did nothing to remove. By this I mean a proliferation of regulations, which make it almost impossible to set up a school in anything but a purpose built building.

12. I would argue, then, that the Conservative party should concentrate its efforts in social policy on, first, identifying what the barriers to an enlarged private market in both health care and education are and try to develop policies for removing them. This would be easier than to start with trying to inject private money into the state system, If the private sector in both health and education can reach a certain critical size –say about 20% -the character of the educational debate and the relative strength of the electoral lobbies will be radically changed.

13. My final word: an Opposition has a choice between speaking in generalities and working out robust policies able to withstand searching scrutiny. I fear we have left it too late to do the second. Perhaps we lack the intellectual or material resources to at this stage of the game. So we will enter the next general election mainly speaking generalities. But at least we should impress on the electorate a sense of direction, and that we have started to do. If, though, it will take two terms to gain power, we should not neglect the second approach. We should prepare carefully for power as Margaret Thatcher’s opposition did in the 1970s. We need not necessarily make public how we intend to proceed, but we should be pretty clear about how we intend to proceed. Come back Peter Lilley: all is forgiven.