Neil O’Brien is MP for Market Harborough and is a board member of Onward.
One of the first big decisions for our next leader will be how to play the Spending Review.
There are some massive decisions to make just weeks after the new Prime Minister arrives, and these choices should be at the heart of the current leadership election. The first is about how fast to reduce debt.
After nine years of difficult decisions, Government debt is forecast to fall from 83 per cent to 73 per cent GDP over the next five years. That means scope to cut tax and increase spending in a prudent way in the near term, while keeping debt as a share of GDP falling.
How should we use this fiscal firepower we’ve built up? We should use it to promote Conservative values. The Spending Review should fund good public services. It should back business, but in a way that helps poor areas. It should help support family life, and help those on low incomes to earn more, and keep more of what they earn.
Let’s start with public services first.
Conservatives must be the party of law and order. We now have room to increase police numbers and fulfil pledges we made in opposition about increasing prison sentences. That requires investing in more prison places. But because the police and prison budgets are relatively small (£14 and £4 billion respectively, out of total spending of £840 billion), it wouldn’t cost much to invest in fighting crime.
School spending is at a record high, but pupil numbers are growing fast. After accounting for inflation, school funding per student is eight per cent below its peak in 2015. We should take real spending per pupil back to its peak and keep it there. That would cost about £4.6bn extra a year by 2022-23. It would be a good investment, and shut down the scare stories put about by the hard left.
The second big thing we need to do is to get the economy moving.
We should learn from Ireland. Between 1990 and 2017 Ireland grew its Gross National Income per capita from 25 per cent below the UK level to 45 per cent above it.
How did they overtake us? Relative to the size of its economy, Ireland attracted four times more inward investment than the UK. Those new factories and offices have transformed productivity, putting rocket boosters under Irish wages. Ireland’s low rate of corporation tax, just 12.5%, has been a magnet for investment.
Since 2010 we’ve cut the UK Corporation Tax rate from 28 per cent to 19 per cent, and it’s scheduled to fall to 17 per cent in 2020. We should finish the job, and cut it to the Irish rate, showing that Britain is open for business.
But it would be no good having an economy that’s only strong in some areas, or for some people.
A report I have out today for the think tank Onward, Firing On All Cylinders, presents clear evidence that more balanced economies are richer overall. There are no large countries which have a more regionally imbalanced economy than the UK, and are also richer than the UK.
It’s not hard to understand why. In an unbalanced economy resources like land and infrastructure are overloaded in some places, but underused elsewhere. Because people (particularly lower skilled workers) don’t simply leave their homes in the face of local economic problems, having greater distances between unemployed workers and job opportunities creates problems, and high unemployment can lock in patterns of worklessness.
Politicians often talk about rebalancing the economy (particularly since the referendum) but policies to do so have often failed.
Labour’s approach didn’t work. Rather than moving a few back-office jobs in the public sector to poor areas, it’s the private sector we need to grow.
We should learn from the way that Margaret Thatcher used investment tax breaks to lure Nissan to invest in Sunderland, transforming not just wages locally, but a whole moribund industry.
My report finds Britain’s tax treatment of investment is the least generous of any G20 country, helping explain why investment and productivity in Britain are so much lower than competitors.
Fixed investment in Britain has been lower than the OECD average in every year but one since 1960, while rising countries like South Korea have nine times more robots per manufacturing worker than the UK, making them much more competitive.
But there’s a double whammy from a tax system hostile to investment: it’s particularly bad for poorer regions, because they are more reliant on manufacturing, which requires twice as much capital investment per worker as the rest of the economy. My report shows how Britain’s unusual tax system helps explain why Britain has de-industrialised more than any other G20 country since 1990, hitting poorer areas hardest.
While manufacturing accounted for around a quarter of productivity growth nationally since 1997, it provided 40-50 per cent of productivity growth in poorer regions like Wales, the West Midlands and North West.
As numerous business groups have argued, we should cut tax on investment. Plus we should go even further in cutting it in poorer regions, to attract inward investment there.
We should give the Department of International Trade a new mandate to drive inward investment to poorer places and also rebalance the government’s most growth-enhancing spending. At present the types of government spending with the greatest potential to spur growth are too concentrated on areas that are already successful.
Finally, the Spending Review must make sure working people feel the benefits of growth in their own pockets.
With the Income Tax Personal Allowance now at £12,500, compared to a National Insurance threshold around £8,600, raising the threshold for National Insurance would help more poor households than raising the Personal Allowance.
Families with children are twice as likely to be poor, because there are more mouths to feed, so helping working families with children on low incomes should be a high priority.
Until the 1970s we used to recognise children in the tax system, recognising that having children reduces your ability to pay tax. It’s time to start doing so again, because Conservatives should support family life as well as hard work.
We should raise the National Insurance Primary Threshold to £13,000 for people with children. That would increase post-tax income by up to £1,100 for a two-earner couple.
And we shouldn’t stop there. Our other great tool to help low income workers is Universal Credit. We should cut tax further for the poorest working families by turning UC into “UC Plus”. That means dramatically increasing UC Work Allowances and creating a separate Work Allowance for second earners, meaning people keep more of what they earn.
UC Plus would increase incomes for working households by up to a further £4,300 for those who benefit most.
We should put the poorest at the front of the queue for tax cuts because we can see from our previous reforms that cutting tax for the lowest paid creates a double win: it increases incomes directly, but also encourages work and increases employment.
I believe strong economies are built on broad foundations: more geographically balanced economies are stronger overall; and economies where all groups see the benefits of growth have higher employment. In short, a strong economy is one that is firing on all cylinders.