Page last updated at 20:50 GMT, Thursday, 26 June 2008 21:50 UK

Cameron's Britain: Tax and spend

By Stephanie Flanders
Economics editor, BBC News

David Cameron and George Osborne
An ill economic wind blows across Conservative economic policies

The same economic problems that could help put David Cameron in No 10 would also tightly constrain his chancellor's options if he should move in next door.

With government borrowing likely to be at least as high as now, there won't be much room for cutting taxes.

The Institute for Fiscal Studies (IFS) is already forecasting a budget deficit of 41bn in 2009-10, and it will be much higher if the economy slows as sharply as many economists now expect.

Tax cuts?

The Conservatives have committed to a handful of tax cuts. They would get rid of stamp duty for first-time buyers of homes up to 250,000 and raise the threshold for inheritance tax to 1m.

These cuts are supposed to be paid for with tax rises elsewhere.

But when the pledges were made last autumn, the revenue was going to come from a 25,000 levy on "non-doms".

Now that the government has imposed a similar levy of its own, it is not clear whether the Tories' proposal would raise enough.

A Conservative government would favour higher green taxes.

But so far there have been few concrete commitments in this area that look likely to raise large amounts of extra cash.

Not least, because several of their key proposals - for example, the move from a per-passenger tax on air travel to a tax per plane - are now government policy as well.

Abolish stamp duty for some first-time buyers
Raise inheritance tax threshold to 1m
Corporation tax cut from 28p to 25p

If green taxes do go up under the Tories, they have said that the extra revenues would go into a Family Fund to pay for tax breaks for married couples.

However, some of the party's other pro-family policies - such as ending the couple penalty in the tax credits systems - will be paid for from savings made from their welfare reform package.

The Tories are also proposing a range of business taxation cuts.

Corporation tax would be cut from 28p to 25p - paid by removing reliefs and reducing capital allowances - while the small companies' tax rate would be kept at 20p.

The Conservatives are also currently doing a lot of work on tax simplification.

PricewaterhouseCoopers are working on the details of simplifying corporation tax and Grant Thornton are working on simplification of VAT, PAYE and National Insurance.

Tighter spending plans

Conservative strategists know that the only way to lower the tax take in a meaningful way will be to make sure that public spending grows more slowly than the economy - so it gradually shrinks as a proportion of the economy.

David Cameron calls this "sharing the proceeds of growth", and it is something that the Conservatives have traditionally been more inclined to do than Labour.

Graph showing split between private and public spending

The IFS has calculated that when the Conservatives were last in office, between 1979 and 1997, the public sector spent around 30% of the cumulative growth in national output, leaving 70% for private spending.

So far the split under Labour has been 46% to the government and 54% to the private sector.

However, the government's latest spending plans for the years 2008-2012 are much tighter than in previous years.

They allow for spending growth of just 2.1% a year in real terms. That is half the rate of growth since 1999.

If achieved - a big if, given past overshoots - these plans would see the government take about 36% of additional output between 2008 and 2012, leaving 64% for the private sector, not far from what the Conservatives achieved in the 1980s and 90s.

If the shadow chancellor, George Osborne, tried to slow spending growth much more sharply than this in his first years at the Treasury, the public would certainly notice.

'Proper public service reform'

David Cameron says he'll square the circle with "proper reform" of public services such as health and education, and by cutting waste and making government more efficient.

As he admits, countless governments - and would-be governments - have gone down this road before.

Michael Howard sets out Tory plans for tax cuts if elected in 2005

Indeed, the current Tory leader was one of the masterminds behind the Conservative manifesto of 2005, which committed the party to billions of pounds worth of spending cuts itemised in their James Review.

But, in a speech on 19 May, Mr Cameron accepted that the review failed to convince voters, who might have viewed it as little more than tinkering at the edges.

The party has learned its lesson. It will not spell out concrete - maybe unpopular - cost savings before the election.

That means that voters will have to take the Conservatives' commitment to leaner government on faith.

Spending less, taxing more

However, Mr Cameron has attacked the government for being "spendaholic" and named several big ticket items where the Tories would save money: axing the NHS computer, axing ID cards and eliminating fraud in the tax credit system.

Ironically enough, for all the efforts to rebrand the Conservatives under David Cameron, party strategists are hoping that some of the old brand still applies.

Given the likely state of the public finances he [George Osborne] could well find himself spending less and taxing more
In tougher economic times, voters could well be more worried about their own budgets than the government's.

That shift in the public's priorities will help the Tories in a general election, if voters still consider them the party that is likely to spend less, at the margin, and tax less as well.

But it will put even greater pressure on the new chancellor if Mr Cameron wins.

Whether he wants to or not, given the likely state of the public finances he could well find himself spending less and taxing more.

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