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The economic policy agenda of the Conservative party1

Nicholas Sowels
p. 131-153


Cet article tente de prévoir quelles seront les propositions de politique économique dans les années à venir, avancées par le Parti conservateur et mises en œuvre par un éventuel gouvernement conservateur après les prochaines élections. L’article note que l’environnement économique et politique est aujourd’hui très différent de celui de 1979, quand les Conservateurs sont venus aux affaires la dernière fois : l’économie britannique se porte plutôt bien ; les prévisions restent généralement optimistes. Il existe également un assez large consensus sur de nombreux domaines de la politique économique. Ensuite, l’article examine le retour au « centre » mené par l’équipe de David Cameron. Toutefois, il observe également que les Conservateurs critiquent la croissance importante des dépenses publiques effectuée par New Labour, dans le but d’améliorer les services publics. Ils proposent donc non seulement de freiner cette croissance, mais aussi de déréglementer, de déconcentrer et d’alléger la gestion des services publics, afin de diminuer les impôts et de renforcer la compétitivité de l’économie britannique.

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  • 1  Conservative Party economic policy from 1997 to 2005 (i.e. until the election of David Cameron as (...)

1 This article examines the state of economic policy thinking by the Conservative Party, as at the end of 2006. It provides something of a snapshot of the formulation of policy since the change of the Party’s leadership at the end of 2005, following the Conservatives’ third electoral defeat in May 2005. Given the relative newness of David Cameron’s accession as leader, and the likelihood that the next election will only take place at the end of the decade, analysing the Party’s economic policy with the aim of predicting what the policy of a future Conservative government might be, must be seen very much as work in progress. The election of David Cameron as leader of the Party has brought about a significant shift in style of the Party’s communication with the public, even if changes in substance still remain rather vague.

2 To put flesh on the bones of the new approach, D. Cameron has launched a series of policy reviews. Their interim reports were published towards the end of 2006, with the full reports set to come out in July 2007 (Conservative Party). One of these reviews on Britain’s “Competitive Challenge” – subsequently known as the Economic Competitiveness Policy Review, published its Interim Report : The Global Opportunity, on 11 October 2006. The document gives some fairly clear indications of the direction Conservative policy is taking. However, any true assessment of the Party’s, let alone a Conservative government’s future economic policy must also take numerous other factors into account. These include the economic policy statements made by the new leadership (notably David Cameron and the Shadow Chancellor George Osborne) and how these fit in with the evolution of the Party’s policies. Much will also depend on the environment which a possible future Conservative government will face.

3 The paper therefore begins by presenting succinctly the probable economic background in which Conservative policy is and will unfold. It subsequently sets out the main features of New Labour’s legacy, showing how they have contributed towards creating a new consensus in many areas of economic policy, which in turn is likely to constrain Conservative policy-making. The paper then examines the broad outlines of the Conservatives’ emerging economic views and proposals. This assessment is essentially about economics, but it also provides an overview of changing Conservative attitudes on welfare and public services, as spending in these areas obviously has a direct impact on fiscal policy. Lastly, the paper picks out the various detailed policy commitments made by the Conservatives so far. The conclusion seeks to summarise what are likely to be the main dimensions of Conservative economic policy in the years ahead.

Britain’s transformed economy

4 Conservative economic policy thinking over the next few years will probably take place against the backdrop of a favourable economic environment. In the short term, growth through to the end of 2007 is widely expected to be around 2.5 %. The Treasury’s comparison of independent forecasts published in the first half of December 2006 suggests that GDP growth may slow slightly from 2.6 % in 2006 to 2.4 % in 2007 (HM Treasury 2006c : 3). Somewhat more optimistic forecasts have also been published recently. For example, the latest OECD Economic Outlook (published in November) estimates growth in 2006 to run to 2.6 %, remaining at this rate in 2007, before rising to 2.8 % in 2008 (OECD).

5 The Labour Government too is more optimistic. In the Pre-Budget Report presented to Parliament on 6 December 2006, Chancellor Gordon Brown states that growth for 2006 is expected to be 2¾ %, rising to between 2¾ % and 3¼ % in 2007. Thereafter, the Government projects growth to remain close to its “neutral” or “potential” trend : i.e. the level at which the economy may grow without putting upwards nor downwards pressure on prices (HM Treasury 2006a : 3). According to the latest Treasury estimates, this trend rate is now thought to be 2¾ % (HM Treasury 2006b : 2).

6 Interestingly enough, future, short-term growth at 2.5 % is precisely the average rate which has been calculated for the period 1962 to 2004. In an academic study produced for the Economic Competitiveness Policy Review (hereafter the ECPR), it is pointed out that Britain’s long term growth has been remarkably constant, even though short-term “undulations” have been significant (Allen et al. : 2). Such fluctuations may still continue in the future, and there are certain risks to growth which should not be ruled out. The most significant amongst these are probably inflationary tensions brought about by high oil prices and a generally buoyant world economy, together with the risks of a downturn in the housing market. At about 2.5 %, increases in the Consumer Price Index in 2006 and 2007 are in the upper-half of the inflation target (2 % ± 1 %) set by the Government for the Bank of England. But monetary policy has been tightening, and there is considerable confidence in the new monetary regime to put sufficient downwards pressure on prices, by raising interest rates if necessary.

7 Higher interest rates, however, hold out some danger of provoking a downturn in the housing market, which in turn threatens to squeeze growth via the impact of negative wealth-effects on consumer spending. But, the evidence on this front is mixed. The house price boom since the mid-1990s has pushed up price levels and associated household debt to record levels. It is generally argued that at some point the rise in prices must come to an end. At the same time, higher house prices are being sustained by changes in real market conditions, notably as demand outstrips supply. Also, even if household borrowing has expanded substantially to finance house purchases, the servicing and repayment costs of a mortgage, while certainly higher than in the late 1990s, are still “historically low” – given low interest rates and income growth (ibid, 34-37). In short, the foreseeable economic environment in which future Conservative policy is formulated will most likely be favourable.

8 This fair economic wind may make certain aspects of policy formulation easier and less risky for the Conservatives. An expanding economy, with low inflation, means sharing out an expanding cake. But, the growth in resources will not be infinite, and cutting taxes significantly while raising spending on public services substantially will surely not be possible. Still, the present constraints on policy are a far cry from the late 1970s when Mrs Thatcher came into office, elected broadly speaking on a mandate to abandon Keynesianism in favour of monetarism, to reduce union power, and more generally to challenge the structures of Britain’s post-war settlement.

New Labour’s policy legacy

9 Given that New Labour has now been in government for nearly 10 years, it is possible to draw some fairly clear conclusions about its policies and how they fit in with historical trends in public policy-making in Britain. Furthermore, for all the fears and hopes surrounding the departure of Tony Blair in 2007 and near-certain succession of Gordon Brown to the Premiership, it is unlikely that there will be any major changes in domestic policy in the years ahead.

  • 2  For an excellent exposition of Gordon Brown’s economic policy thinking, and how it has evolved ove (...)

10 Indeed, it is argued here that a new consensus has emerged concerning the management of Britain’s economy and large areas of public policy. To be sure, New Labour has spent massively on public services since the turn of the century and has specifically acted to reduce certain forms of poverty. In both these fields, its actions have been very different from those of the preceding Thatcher-Major governments. But, New Labour has also adopted much of the previous Conservative agenda, and this is as true of Gordon Brown, despite his occasional appeals to the Old Left in the Labour Party, as it is of Tony Blair.2 As a result, considerable consensus now appears to exist relating to monetary policy, certain aspects of fiscal policy, employment policy, the management of public services, and numerous areas of welfare policy. The Conservatives, as we shall see below, are likely to take many policies of this new consensus forward, though they are also likely to propose changes in taxation, and seek new financing mechanisms for public services.

11 In terms of macroeconomic policy, Britain’s new monetary regime may in many ways be considered as the centre-piece of New Labour’s action and also as the heart of the economic new consensus. After the policy upheavals of the 1980s and early 1990s – which saw Britain attempt near-pure monetarism, succeeded by poorly-defined anchors for monetary policy that were then ultimately followed by the thwarted experience of ERM membership (October 1990 to September 1992) – a new monetary policy regime was progressively put into place in the wake of the pound’s disastrous ejection of the ERM. This new regime started by introducing direct inflation targeting as the goal of monetary policy. It also gave greater weight to the Bank of England in analysing future inflation trends and gave the Bank a larger, public role in setting interest rates.

  • 3  The Monetary Policy Committee is made up of nine members : five are leading Bank officials, while (...)

12 It was only with the arrival of New Labour, however, that the construction of this new monetary regime was completed, when the Bank of England was granted “operational independence” in May 1997. Under the new procedures, which were formalised by the Bank of England Act 1998, the Chancellor retains ultimate responsibility for monetary policy before Parliament, and it is the Chancellor who sets the level of inflation which the Bank is required to target : currently 2 % ±1 %. However, it is the Bank, or more precisely the Monetary Policy Committee (MPC),3 which has the operational responsibility for achieving this target. Should inflation stray outside its target range, then the Governor of the Bank must write an “open letter” to the Chancellor explaining why this is occurring, and what the MPC plans to do to bring inflation back within its target range.

13 Though originally taken aback by New Labour’s granting of operational independence to the Bank of England, the Conservatives have subsequently accepted the new regime, and both David Cameron and George Osborne have gone on the record to state that a future Conservative government will leave the present arrangements in place (see below). In short, there now exists a broad consensus between Britain’s main political parties, and indeed within much of the economics profession, that monetary policy should be conducted by an independent central bank, using short term interests to influence the evolution of inflation, in a forward-looking manner. Today’s world thus is very different from the one which existed in the early 1980s, when the first Thatcher government tried to pursue strict monetarism, and 364 economists wrote to a letter The Times criticising the policy-mix of the 1981 budget which squeezed fiscal policy in the trough of a recession while bringing down interest rates.

  • 4  For a brief overview of official policy, see the Treasury’s webpage entitled “Fiscal policy in the (...)

14 In contrast, the story on fiscal policy is more complex. New Labour came into office, pledged to retain the Major Government’s public spending plans for two years. Moreover, New Labour has made repeated and strong claims of having adopted a new fiscal policy framework, based specifically on two rules :4

  1. the golden rule: over the economic cycle, the Government will borrow only to invest and not to fund current spending; and

  2. the sustainable investment rule : public sector net debt as a proportion of GDP will be held over the economic cycle at a stable and prudent level.

15 The latter rule has subsequently been interpreted by the Chancellor to mean that public sector net debt should not rise above 40 % of GDP. More generally, New Labour has pledged itself to honour its Code for Fiscal Stability. Adopted by Parliament within the Finance Act 1998, the Code calls on fiscal policy to be conducted according to the principles of transparency, stability, responsibility, fairness and efficiency. Its overall aim is to emulate the transparency and accountability of the new monetary regime (HM Treasury, 1998).

16 The austerity of New Labour’s early years, combined with a growing economy, actually saw public spending fall to its lowest share of GDP in decades, bottoming out at 37.2 % of GDP in the financial year 1999-2000. Since the turn of the decade, however, New Labour has embarked on an ambitious build up of public spending, especially to finance health, education, transport and certain transfer payments. As a result, public spending rose to around 42 % of GDP by the middle of the decade. The rise in spending has been partly matched by higher tax revenues, notably as more households have moved into the higher, 40 % tax band, and through higher indirect taxes (stamp duty, petrol and fuel taxes, customs and excise on tobacco and alcohol, etc.). Annual public spending deficits also have risen significantly to finance greater outlays.

17 Overall, New Labour is thus generally considered to have reached, if not breached the limits of its fiscal rules. It has arguably managed to keep within the “golden rule” by bringing forward the start of the present economic cycle to 1997-98, though to several commentators, breaking the rule as such is of relatively little immediate economic importance (see, for example, Barrel et al.). Nevertheless, it clearly creates hostages to fortune in terms of the government’s policy credibility and further deficit spending could well store up problems of the future (Chote, et al.). On the debt front too, the Government remains within its self-imposed 40 % ceiling of public sector net debt. However, on other measures, debt has been rising more rapidly.

18 This substantial run-up of public spending, and its attendant increase in taxation (both in terms of tax proliferation and higher tax rates) have been continuously criticised by the Conservative Opposition, and as we shall see below, fiscal policy has therefore emerged as a clear field of contention between the two major parties.

19 At the same time, New Labour has pursued many of the economic policies implemented by its predecessors. This is especially the case of its approach to the labour market. In line with its monetary orthodoxy and fiscal prudence, New Labour has quite clearly continued to shut out the social partners, and especially the unions, from all areas of policy formulation. At a microeconomic level too, New Labour has not restored the powers and privileges previously enjoyed by Britain’s trade unions. On the contrary, it has supported the pro-market approach to dealing with employment/unemployment it inherited from the Thatcher-Major years. This may be seen not just in terms of labour and union legislation, but also in terms of welfare benefits. Unemployment benefit, or the Jobseeker’s allowance, is very parsimonious. Pensions and other benefits remain indexed to inflation and not wages, thus increasing the relative gap between them. Getting people into “work” has been clearly put forward by both Tony Blair and Gordon Brown as primary means for fighting poverty, social exclusion and so on.

20 Similarly, New Labour has accepted the Conservatives’ privatisation legacy, as well as their reforms of non-marketable public services. The re-nationalisation of Rail Track took place because the company went into liquidation. It was not the start of a new approach to public ownership of industry. The Thatcher-Major policies of marketising public services, breaking up historical public bureaucracies, enforcing so-called New Public Management, redefining citizenship in terms of consumer rights, etc. have all been strongly pursued by New Labour, though perhaps a little more enthusiastically by Tony Blair than by Gordon Brown.

21 The new consensus between New Labour and the Thatcher-Major legacy is therefore very broad. New Labour has significantly raised public spending in a number of areas. But its overall approach to managing the public sector follows on very much from its predecessors. New Labour has thus captured the centre ground of the new consensus, making it all the more difficult for the Conservatives to position themselves as a moderate alternative.

David Cameron’s and the Conservatives’ return to the centre-ground

22 Devising a more politically-attractive platform, however, is precisely what David Cameron and his allies in the Conservative Party are now trying to do. As he noted in a speech on Modern Conservatism, made shortly after becoming leader of the Party, Labour’s transformation into New Labour left the Conservatives unsure of “how to deal with [their] victory in [the] battle of ideas”. As a result, the Party shifted to the right, focusing on areas in which Conservatives did not agree with Labour : “tax cuts, immigration, Europe”. D. Cameron’s response to three electoral defeats which ensued is to bring the Party back to the centre-ground, “the alternative [...being] irrelevance, defeat and failure” (Cameron 30/1/2006).

23 In policy terms, this fundamental change of tack has led David Cameron to initiate a wide-ranging series of reviews, including one focusing on Britain’s “Competitive Challenge”, later called the Economic Competitiveness Policy Review. Another looks at public services. More generally, it quickly becomes clear that under his leadership the Party is now trying to formulate policies which will allow it to pursue a broadly neo-liberal economic policy agenda, while at the same time addressing Britain’s chronic social problems and improving the performance of public services, as well as the actions of the voluntary sector to meet these.

  • 5  These figures are calculated by the Swiss-based World Economic Forum (WEF), which organises the “D (...)

24 From a strictly macroeconomic point of view, David Cameron and shadow-Chancellor George Osborne unsurprisingly have taken on-board the main elements of the neo-liberal, free-market policy regime established by the Thatcher-Major governments, and continued by New Labour. In a speech entitled Creating wealth and eliminating poverty : At home and abroad, made during the leadership election, David Cameron asserts unambiguously that “free markets are essential for the creation of wealth”, and that “no government can run businesses and create wealth”. In a similar vein, he picks up previous Conservative criticisms of New Labour’s over-regulation of the economy, and he quotes extensively the World Economic Forum’s assessment of Britain’s competitiveness, which is claimed to have fallen from 4th in the world to 13th , in the years 1997 to 2004.5 The hostility to regulation is also put forward in relation to the European Union, which David Cameron accused of being characterised by a “regulatory culture” (Cameron : 8/11/2005).

  • 6  It should be noted that the Conservatives’ current analysis of Ireland’s economic success plays do (...)

25 Support for free-markets also goes hand-in-hand with the Conservative Party’s past and present views relating to taxation and public spending. Time and again, D. Cameron, his predecessors and his present collaborators have admonished the Government for raising taxes, increasing spending and expanding public sector employment and hence burdening the private sector (see, for example, Osborne : 12/7/2006 and Cameron : 30/1/2006). Specific tax measures have also been criticised, such as the abolition of tax breaks for pensions, which are claimed to have badly damaged private pensions schemes (ECPR, 2006a), and the rises in stamp duty on house purchases, attacked as contributing to worsening the housing problem (Osborne : 8/2/2006). The low tax message also comes across in the repeated references made to Ireland’s economic success. This is attributed very much to the Celtic tiger’s low business tax (a flat-rate of 12.5 %) which is interpreted as the overwhelming factor (along with education) in attracting foreign direct investment to Ireland, especially by high technology firms from the United States (Osborne : 23/2/2006 ; ECPR, 2006b).6The clear message is that taxation discourages wealth creation, and the ECPR has commissioned and published a lengthy report on tax reform (discussed below).

26 The Conservatives’ disapproval of higher taxation parallels their views of higher public spending. As with its predecessors, David Cameron’s team has castigated the Government for its profligacy and of breaking its own fiscal rules by pouring money into public services (e.g. : Osborne : 7/9/2005). More specifically, they argue that while public services do indeed require more resources, the massive increase in public spending since the late 1990s has done little to improve services. The reasons for this are multiple, though a chief cause is often presented as being the over-centralisation and micro-management of the public sector, orchestrated by Gordon Brown and the Treasury in particular. In a speech to the Policy Exchange think-tank in July 2006, George Osborne strongly criticised the expansion of the Treasury’s duties and especially how it has taken on functions traditionally assigned to so-called spending Departments. He notes that Gordon Brown has added to “his empire” by getting the Treasury to administer tax credits, child benefit and child trust funds, which have a combined annual budget of over £20 billion. At the same time, the Treasury is increasingly active in the detailed management of other Departments’ work, via the Public Service Agreements (PSAs), that were first launched by the 1998 Comprehensive Spending Review. As a result, Departments and public service providers are being over-burdened by batteries of performance targets, often changing and frequently leading to “perverse effects”, whereby service providers organise their activities so as to meet targets rather than the public’s actual needs (Osborne : 17/7/2006).

27 G. Osborne has equally criticised the expansion of public sector employment under New Labour, up by “over half a million”. In a direct echo of R. Bacon and W. Eltis’s thesis in the 1970s that Britain was suffering from “too few producers” (Bacon and Eltis), he claims that “people are now not available to work in the private sector, so inhibiting businesses’ ability to grow. Public sector growth has been crowding out the rest of the economy” (Osborne : 12/7/2005).

  • 7  For an extensive summary of the agreement, see the Trade Union and Labour Party Liaison Organisati (...)

28 More generally, the new Conservative leadership has taken up the charges that Labour has greatly expanded public sector bureaucracy and accommodated public sector unions in the process in pursuing its social policies and expanding services. In November 2005, David Cameron asserted that “Gordon Brown’s favoured solution to poverty is straight out of the textbook of big government. The state handing out means-tested benefits on a vast scale ; the state running programmes to get people into work ; the state developing ever more complex rules, processes and initiatives, but still leaving people and families behind” (Cameron : 8/11/2005). In Modern Conservatism, he notes that the “Blair/Brown Government has put its faith in legislation, regulation and bureaucracy”, leading to an explosion of the civil service – which with “560,000 employees […] is now bigger than Sheffield” – and to a 50 % increase in the “cost of government” (Cameron : 30/1/2006). The expanding cost of public services, which is not mirrored by greater output or efficiency, is also put down to “producer capture”, whereby the public sector unions obtained “major concessions” from the Government in the Warwick Agreement, drawn up at Warwick University in July 2004. These concessions include “an extension of protection for striking workers, funding for a union academy, government support for the EU agency workers directive and – perhaps most significantly – a commitment that the bulk of NHS services would be directly provided” (Osborne : 17/7/2006).7

  • 8  Co-founder of the Centre for Policy Studies with Keith Joseph.

29 These views are much in line with Conservative Party thinking going back to the 1970s, when the New Right emerged around Mrs Thatcher and her close allies at the time (Keith Joseph, Alfred Sherman8, etc.). What is new, however, is the commitment by David Cameron’s team to rethink social and welfare policy. This constitutes a distinct break both with the Party’s recent leaderships, and with much Conservative policy-making since the rise of the New Right.

30 A key, almost-philosophical shift may be observed from this point of view in relation to the question of poverty. The New Right had clearly pushed poverty-reduction and more particularly income-redistribution as explicit policy goals, off the Conservative agenda. For example, in 1979 Keith Joseph and Jonathan Sumption published a book on Equality, asserting that it was not possible to make the poor richer by making the rich poorer, and that the poor can only be made richer by making everyone richer. Along these lines they also stated that “[b]y any absolute standard there is very little poverty in Britain today” (Joseph and Sumption : 27). Similar views were repeated by David Willets in his own book on Modern Conservatism, published in 1992, in other words following the decade in which inequality rose strongly in Britain : he states emphatically that “[egalitarianism] cannot be absorbed into conservative thought” and that “equality is now the key anti-conservative concept” (Willets : 109).

31 To be sure David Cameron and the new Conservative leadership have not adopted a policy of income redistribution, and their notion of equality remains qualified by individualism, as may be seen, for example, in D. Cameron’s speech to the Conservative Party conference in 2006, in which he notes that “real equality means giving every child the education that is best for them” (Cameron : 4/10/2006). Nevertheless, other recent pronouncements on poverty have been strikingly different from days past. Thus, in his CPS speech of November 2005, David Cameron clearly states that “a rising tide does not lift all boats”. A year later, in commenting on the interim report of the Social Justice Policy Group, he observed that “[p]arts of the country are not merely falling behind as the rest of Britain gets richer. They are actually going backwards. More people are in severe poverty than a decade ago [sic]” (Cameron : 14/12/2006). In his conference speech, George Osborne too stressed that the Party was now looking at “issues that [they] haven’t always talked about”. He went on to claim that matters like childcare and equal pay for women were “issues [that] go to the heart of what it means to be a civilised society” (Osborne : 3/10/2006).

32 Such new thinking is also astonishingly apparent in relation to public services, at least within David Cameron’s policy-making teams, if not yet as official Party policy. The interim report by the Public Service Improvement Policy Group, The Wellbeing of the Nation, makes truly remarkable reading for anyone with memories of the Conservatives’ former “roll back the state” culture. Its opening paragraph notes that : “The ‘wealth, peace and tranquillity of the realm’, to which trustworthy public services contribute, are as much a part of the good life as are an individual’s personal circumstances”. The introductory chapter goes on to claim that delivering the “finest public services” does not come through the “plethora of targets and controls which have been introduced, often for the best of motives, over the last quarter of a century by both Labour and Conservative Governments”. With equal aplomb, the report continues : “there has been a vastly overstated focus on what the public sector can learn from the private sector”, that governments should “develop a well-qualified and well-motivated workforce in public services”, and that “[i]mprovements in services will only be achieved if the professionals […] are themselves motivated by a sense of public trust…”. Such opinions may seem obvious to sceptics of New Public Management, and the “methodological individualism” of public choice theory which were used to justify the breaking-up and restructuring of the public sector. But they go against the whole thrust of public sector reform that can be traced back to the first Thatcher government (1979-1983).

33 Squaring the circle of holding down public spending growth to allow tax cuts and improving public services will of course not be easy for future Conservative policy-makers. Indeed, electoral pledges to cut taxes and strengthen services stoked up public scepticism of the Conservatives in both the 2001 and 2005 elections. Thus, in a pre-conference interview, David Cameron went on the record stressing the importance of putting stability before tax cuts, “because we’ve all got mortgages and mortgage rates matter more than anything else” (Cameron : 1/10/2006).

34 Otherwise, emerging policy proposals by the Conservatives look to developing the “third sector” – i.e. the voluntary sector – as a way of circumventing the financial constraints which come with improving public services. Generally speaking, David Cameron’s team has been stressing the fact that public services need not necessarily be supplied by public organisations or public employees. This position is much in line with previous Conservative thinking, and indeed New Labour policy in several areas. More original, though obviously untested, is the emphasis he is now putting on getting the voluntary sector to make a major contribution to social justice : “[t]he 21st century calls for a new approach. Less state control, more social responsibility. Not just state welfare, but social welfare too. That is our ambition for the social sector […] a social revolution as dramatic as the economic transformation of the 1980s” (Cameron : 14/12/2006). Quite how this will take place remains to be seen, though he has said he wants to give voluntary bodies a “right to supply” services where they can do a better job than government. More specific proposals also include improved pubic financing to help the voluntary sector, by ensuring the full cost recovery for voluntary activities (i.e. funding including overheads and not just running costs) and by lengthening funding cycles, beyond current one-year budgeting (ibid).

35 Whether massively boosting the voluntary sector will actually change the resource constraints at work in public services is of course much open to question. Efficiency gains can be made in all organisations. Local suppliers may generally have better knowledge of local conditions than central government officials. The incentives of persons working for voluntary organisations may indeed be less oriented to pay than in private sector, or even than in public bodies running along the lines of private companies.  Voluntary suppliers may therefore be able to provide cheaper services, without sacrificing quality. However, upward pressure on government spending is inexorable due to demographic ageing, the cost of new, high-tech services and slower productivity growth in services than manufacturing, etc. Such cost constraints are especially visible in areas like health, and perhaps to a lesser extent in education. But they influence numerous areas of government work. Pressure on spending will also continue to come from transfer payments, notably pensions.

Specific policy proposals and commitments by the new Conservative leadership

36 The previous section discussed at length the general thrust of the Conservative Party’s current economic thinking, also touching on certain broad aspects of its social and welfare policy views, as these will condition economic policy-making in the future. This section aims to set out and comment more specific commitments which have already been made by the new Conservative leadership. It draws largely on the work of ECPR, whose final report is to be published in July 2007.

37 In strict macroeconomic terms, the Conservatives are now of course committed to retaining the Bank of England’s operational independence, as already noted above. This may not seem like much or indeed as being “old hat”. Nevertheless, it still represents a break with Tory tradition : John Major was against such independence on the grounds of Parliamentary sovereignty and British governments have rarely devolved power.

38 The Cameron team has also gone on record in ruling out membership of Economic and Monetary Union : at the Party conference in 2006, George Osborne emphatically stated that, “we will never link our currency or join the euro” (Osborne : 3/10/2006). This is a stronger, more definitive commitment than, say, William Hague’s pledge in the late 1990s not to join the euro for at least 10 years.

  • 9  The Commission is headed by Lord (Michael) Forsyth of Drumlean, whose links to the New Right go ba (...)

39 In terms of fiscal policy, the Conservatives have clearly stated that they would like to cut taxes. More specifically, in the above-mentioned conference speech, G. Osborne also said that taxes should be “simpler, flatter and fairer”, and that he “want[s] to shift the tax burden from families, jobs and investment onto pollution and carbon emissions”. To come up with a detailed analysis and list of proposals, the Conservatives requested a report on taxation from the “independent” Tax Reform Commission.9 Its findings were published in October 2006, and include 40 specific and costed proposals for changing taxation. Among the most significant are reductions in income tax for lower incomes, cuts in corporation tax, changes in the calculation of corporation tax, changes in capital gains tax, and the abolition of stamp duties on trading UK shares (see Table for more detail).

Table 1: Main Proposals by the Tax Reform Commission, according to impact on government revenue






effect (£m)


Raise the personal allowance to £7,185 and abolish the 10 per cent rate



Introduce a transferable allowance for couples with a child aged five or under



Reduce the basic rate of income tax to the savings rate of 20 per cent



Review all tax free employee benefits and either abolish, restrict or simplify them



Reduce main rate of corporation tax to 25 per cent and over time introduce a single rate of 20 per cent



Replace the scheduler system with a system based on accounts



Abolish R&D tax credits and film tax credits



Introduce a short-term capital gains tax which tapers to zero over years to replace the current system of taper relief and indexation



Stamp duties on UK shares should be abolished


Source: Tax Reform Commission, Tax Matters, Reforming the Tax System, October 2006, p11-12.

  • 10  The report states that : “every extra one percent growth would yield an additional £5,000 million (...)
  • 11  ICAEW – Institute of Chartered Accountants in England and Wales.

40 There is of course a long way to go before Conservative policies will be put into practice, and as was noted above, the new leadership has emphasised the importance of stability. But underlying this, there is a certain hope that Britain’s favourable growth will generate more government revenue to allow for both tax cuts and real (if not relative) increases in public spending : see for example, the Interim Report, The Global Opportunity, of the ECPR.10 A second point to be observed is the stated wish by the Conservatives to simplify taxes. Under Gordon Brown’s Chancellorship, the British tax code has indeed grown more complex, thus increasing both public and private administrative costs : again the Interim Report quotes an ICAEW survey which “shows that each British company spends an average of £13,464 a year implementing new legislation”.11 Introducing flatter, simpler taxes, albeit with larger tax bases is often put forward by those on the right – in the United States especially – as a way of raising the efficiency of the tax regime and raising incentives for the private sector. Yet, as Lord (Geoffrey) Howe himself has noted, simplifying taxes is extremely difficult and laborious, while “there is no chance of a knock-out success against tax complexity” (Howe).

41 Turning to labour market policies, it is interesting to note that these are fairly absent from current Conservative proposals. That said, at the party conference David Cameron pledged to keep the minimum wage (Cameron : 4/10/2006). However, this would not stop it from withering on the vine, if not adjusted at least for inflation (as has notably been the case in the United States, for example). But otherwise few commitments nor comments have been made about Britain’s adherence to the Social Charter/Protocol of the European Union. Generally, however, it may be assumed that a Conservative government will push to defend a deregulated labour market, both in Britain and the EU. Indeed, the Interim Report clearly considers that :

Bad regulations have added extra costs and obstacles for people attempting to buy goods and services, and have unnecessarily eroded business investment, innovation and productivity.

There is a vast stock of regulation in need of review, but there is a far greater burden on the competitiveness of UK businesses from the seemingly endless flow of new regulations from the EU and UK Governments…it is time to re-balance the legislative drivers and process so that bad regulations can be stopped and removed.

42 Finally, after reviewing what it considers to be the constraints placed on the British economy’s competitiveness (ranging from the failures of higher education to provide skills, the problems of pensions, public sector efficiency, science and technology skills shortages, poor transport, etc.) the Interim Report states that the full Report of the ECPG will offer “solutions to the following problems” :

  1. The shortage of transport capacity of all kinds. We are examining a range of options to raise the rate of investment in transport networks, particularly through private capital.

  2. The high price of energy. We will offer regulatory changes which encourage the provision of more local energy schemes, and offer sufficient supply of gas […]

  3. The high and growing burden of regulation. We will offer proposals for cutting the volume and impact of regulation on business […]

  4. Taxation. We will examine options put forward by the Tax Reform Commission to restore the UK’s tax competitiveness […] We will show how raising the growth rate will itself swell public revenues.

  5. Higher education. […] We will provide options to make it easier and more attractive for UK universities to raise endowment money and to grow their asset base.

  6. Skills. We will recommend ways of increasing the numbers taught physics, maths and chemistry to a reasonable standard, and ways to make the vocational strand of education more worthwhile. […]

  7. Pensions and savings. We will propose means to make it more attractive for people to save for their retirement, and for the other big events of life.

  8. Wider [share and home] ownership. […]

  9. Intellectual property and knowledge transfer. We will offer means to strengthen the UK’s ability of transferring ideas from the laboratory and classroom to the factory and office.

  10. Public sector efficiency. We will present a menu of ways that productivity and quality can be improved in the main public services.

43 The Interim Report concludes by asserting that public policy should help make Britain “more competitive in this fast changing world”. It very much embraces the “competition worldwide [which] is bringing ever better services and goods within the purchasing power of the many”, and the Report ends on a deliberately optimistic note that “[a]s a nation we have the ability to build a stronger economy and a more caring society”.


44 Conservative economic policy-making in the years ahead will be shaped by a number of phenomena. Significantly, it is likely to occur during a continued period of relative prosperity for the British economy. This will make choices easier than in the past – notably when compared to the run up to the elections in 1979. At the same time, it will continue to make it difficult for the Conservatives to reposition themselves as a party of the centre, especially as New Labour has taken on board, and pursued, much of the Thatcher-Major programme.

45 Indeed, there is now quite a broad consensus in many areas of economic policy-making. This is seen most clearly in terms of monetary policy, and the Bank of England has “operational independence” to fix interest rates, in order to meet the Government’s inflation target. The Conservatives are pledged not to change these arrangements. Considerable consensus also exists on the boundaries of what the State should do and how it should do it. New Labour has not gone back on the Conservative’s privatisation programme. It has extended New Public Management in many areas of the public sector, and so on. It is difficult for the Conservatives to attack these policies, which they themselves formulated originally, though some pronouncements by the new Conservative Party leadership in the fields of welfare and social policy – which obviously have implications for public spending and hence fiscal policy – are strikingly different from the “roll back the state” culture of the Thatcher-Major years.

46 The Conservatives are thus in many ways faced with a policy conundrum. On the one hand, they would like to reduce government spending and deficits, to allow for cuts in taxation. On the other hand, they understand that cutting public services is not a vote-winner. To try to have it both ways, they are therefore proposing to decentralise services, and in particular to encourage the voluntary sector to push forward social welfare. While it may be possible to obtain some efficiency gains in this way, it must nevertheless be strongly doubted that public services can be significantly improved, while spending and taxation are cut markedly as a share of GDP.

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Allen, B., Baroudy, E., Paulson, B. and Sinclair, P., Growth in Britain, study prepared for the ECPR, 20/10/2006,

Bacon, R, et Eltis, W, Britain’s Economic Problem : Too Few Producers, 2nd edition, Basingstoke, Macmillan, 1978.

Barrel, R., Kirby, S., Metz, R., Weale, M., “The Labour Government’s Economic Record and Economic Prospects”, National Institute Economic Review, n° 192, avril 2005.

Conservative Party, Beginning Intellectual Renewal: Policy Groups & Task Forces, 2006

Cameron, D. (8/11/2005), Creating wealth and eliminating poverty : At home and abroad, speech at the Lewis Media Centre, reprinted by the Centre for Policy Studies, London, 2005.

Cameron, D. (30/1/2006), Modern Conservatism, speech at Demos,

Cameron, D. (1/10/2006), “A revolution in social responsibility”, News Story,

Cameron, D. (4/10/2006), speech at party conference,

Cameron, D. (14/12/2006), From state welfare to social welfare, speech for the National Council for Voluntary Organisations,

Chote, R., Emmerson, C., and Frayne, C., “The Public Finances”, Election Briefing Note No 3, 2005, IFS, 2005,

ECPR - Economic Competitiveness Policy Review, (2006a), Policy Group progress report, 29/9/2006, downloaded by author 8/10/2006, from, no longer available on 2/1/2007.

ECPR - Economic Competitiveness Policy Review, (2006b), Interim Report: The Global Opportunity, 11/10/2006,

HM Treasury, Code for Fiscal Stability, 1998,

HM Treasury (2006a), Pre-Budget Report 2006, 6 December 2006,

HM Treasury (2006b), Trend growth: new evidence and prospects, December 2006,

HM Treasury (2006c), Forecasts for the UK Economy: A comparison of independent forecasts, compiled by the Macroeconomic Prospects Team, December 2006, No 236,

Howe, Lord (Geoffrey), “Simplicity and Stability : The Politics of Tax Policy”, 8th Hardman Memorial Lecture 2000, British Tax Review, No2 for 2001, and Centre for Policy Studies.

Keegan, W., The Prudence of Mr Gordon Brown, Chicester, John Wiley & Sons, 2004

Joseph, K., Sumption, J., Equality, London, John Murray, 1979.

OECD, “United Kingdom country summary”, Economic Outlook, No 80, November 2006,,2340,en_2649_201185_19726196_1_1_1_1,00.html.

Osborne, G. (12/7/2005), “Principles of a Conservative Economic Policy”, A speech to the Centre for Policy Studies, Centre for Policy Studies, London, 2005.

Osborne, G. (7/9/2005), speech to the Social Market Foundation, available at

Osborne, G. (23/2/2006), speech to the University College Dublin’s Michael Smurfit School of Business,

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Osborne, G. (17/7/2006), Speech by the shadow chancellor to the Policy Exchange thinktank,

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1  Conservative Party economic policy from 1997 to 2005 (i.e. until the election of David Cameron as leader of the Party) is presented by the author in his chapter “La politique économique du Parti conservateur de 1997 à 2005”, in Fons, J-Ph. (dir.), Le Parti conservateur 1997 -2007. Crises et reconstruction, Rennes, PUR, 2007.

2  For an excellent exposition of Gordon Brown’s economic policy thinking, and how it has evolved over the years, see Keegan, W., The Prudence of Mr Gordon Brown, Chicester, John Wiley & Sons, 2004.

3  The Monetary Policy Committee is made up of nine members : five are leading Bank officials, while the four outside members of the MPC are appointed by the Chancellor.

4  For a brief overview of official policy, see the Treasury’s webpage entitled “Fiscal policy in the UK”,, 29/12/2006.

5  These figures are calculated by the Swiss-based World Economic Forum (WEF), which organises the “Davos conferences” bringing together international business leaders and politicians. They provide one measure of economic competitiveness, which is in fact a complex issue and hard to quantify in an absolute sense. It is the subject of quite some controversy in the economics profession. Nevertheless, the WEF assessment features repeatedly in current Conservative policy literature, see also for example, the “About Us” section on the Internet pages of the Competitive Challenge Policy Review :

6  It should be noted that the Conservatives’ current analysis of Ireland’s economic success plays down the role of financial support which Ireland has received from the European Union, as well as any benefits Ireland may have drawn from being a founder-member of the ERM and Ireland’s subsequent entry into Economic and Monetary Union. Last but not least, Conservative appreciation and approval of Ireland’s economic policy environment makes absolutely no mention of significant tripartite policy-coordination : i.e. the Social Partnership Agreements that have existed between government, employers and unions, since the late 1980s. These are detailed, national agreements setting out broad norms for wage increases, linked to a wide range of development targets to be pursued by the private and public sectors. The latest agreement was signed in 2006, for a period of 10 years. Both these aspects of the Irish economy – European integration and what is generally termed in Britain as “corporatism” – are characteristics which are exceptional to Ireland among the English-speaking, liberal/neo-liberal economies (Britain, the United States, Canada, Australia and New Zealand). They are seen by many as having contributed substantially to the stability and growth of Irish economy, since the crisis of the early- to mid-1980s.

7  For an extensive summary of the agreement, see the Trade Union and Labour Party Liaison Organisation’s article “Full Employment and Working in modern Britain : The TULO Guide to the Warwick Agreement National Policy Forum 25 July 2004”,

8  Co-founder of the Centre for Policy Studies with Keith Joseph.

9  The Commission is headed by Lord (Michael) Forsyth of Drumlean, whose links to the New Right go back to the 1970s.

10  The report states that : “every extra one percent growth would yield an additional £5,000 million a year of extra tax revenue to spend on public services, and an extra £7,000 million for individuals and families to spend…”. Similarly, the study by Allen et al. commissioned by the ECPR Group, and clearly notes that “faster growth creates room for more tax cuts and extra health, education and social spending”, 2.

11  ICAEW – Institute of Chartered Accountants in England and Wales.

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Nicholas Sowels

Maître de Conférences à l'Université de Paris 1 Panthéon Sorbonne

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