thetorydiary

George Osborne has written for The Telegraph today and has warned that "2010 will be the year when the world's focus shifts from the debts in our banks to the enormous debts being run up by governments".

He notes that rating agencies have downgraded Greece and that Britain is the most vulnerable country of any of the top-rated nations in the world.  He lists a number of global banks that reacted negatively to Alistair Darling's PBR, including Barclays who said that "the UK's triple-A sovereign credit rating and the currency are likely to remain vulnerable".

Mr Osborne spells out what would happen to Britain if international investors lose confidence:

"The people of Greece know what happens when the world loses confidence in your ability to pay your bills. It's costing them an additional 2.5% on the interest rates they are paying to borrow. Before Sweden started dealing with their debts in the Nineties, it faced a market penalty of 4.5%. Britain is borrowing more than Greece, and more than Sweden was. All that is saving us at the moment is the expectation that a future Conservative government will get a grip. If Labour get in again, that won't happen. If Britain follows Greece, the interest bill on a £150,000 mortgage could go up by more than £200 a month. The cost of credit for businesses would go up, too, and more jobs would be lost. And we'd be paying billions more in taxes each year just to service the national debt."

Mr Osborne is right to warn Britain that Labour has no plan to cut Britain's deficit. It is also true that he is yet to announce a deficit reduction plan of his own. We have had some austerity measures from the Tories but only a fraction of what is going to be necessary. Every day Tories are in the press attacking the very few measures that Labour has taken. In the FT today, for example, William Hague is criticising David Miliband's cutbacks to Britain's Foreign Embassies.

George Osborne got it right. This was the pre-election report of a government ducking the hard choices.

Over the next six years the British state will borrow £789bn.  The national debt will treble. We heard nothing from Labour on how they will deal with this national crisis.

Despite falling prices the Chancellor promised pensioners a 2.5% cash increase. That's a 4% real terms increase. That's not only a ducked hard choice but a transparent and unaffordable bribe.

Darling ducked an apology for getting his forecasts so wrong. A year ago he said the economy would shrink by 0.75% to 1.25%. It's actually due to shrink by 4.75%. Last year he forecast that this year's deficit would be £78bn. It's actually £178bn. Can you believe a word he says?

Darling didn't tell us how he'd cut spending after the coming [election] year. He's actually spending £7bn MORE this year. Crazy duck.

In the more immediate term he talked about the departmental budgets he will increase but kept silent about those he will cut.

Darling didn't tell us how he hoped to fashion a 3.5% growth rate but based his estimates of future budget deficits on that optimistic level of growth.

It's difficult to see how the economy is going to create more jobs given another increase in National Insurance contributions. It's difficult to see how the economy is going to create jobs given the extra burden he imposed on 40p income taxpayers by failing to link the threshold to prices.

Tim Montgomerie

Two days ahead of the Pre-Budget Report, today's ConHome is very tax-focused.

On CentreRight, Matt Sinclair of The TaxPayers' Alliance warns that higher VAT will undermine the Tory claim to be a pro-poor party. VAT, Sinclair writes, "costs the poorest twice as much - as a portion of their income." The TPA wants a combination of deep spending cuts, public sector reform and pro-growth policies to cut the deficit.

Essential to growing the economy is lower corporation tax, writes Lord Forsyth on Platform. Forsyth, who was chosen by George Osborne to write a landmark report for him on tax in 2005, says that lower corporation tax - he recommends 20p in the pound - and the repeal of the 50p tax band are essential to get the British economy going again.  Britain, he says, is ranked 83rd in the world taxation league table after the Brown-Blair decade of more than one hundred tax increases.

73% of Tory members fear that George Osborne will have to impose larger-than-necessary tax increases because he has only outlined very modest spending reductions so far. The Shadow Chancellor is not being helped by the tendency of his frontbenchers to rush to spend any savings they identify. Last week I suggested he impose a requirement that two-thirds of departmental savings identified by 'spending spokesmen' be earmarked for deficit reduction.

In an interview with the Financial Times George Osborne gives no indication that he is yet ready to bite the bullet on much deeper spending cuts but his pro-business attitude is encouraging. He says he wants Britain to have “the most attractive and competitive corporate tax regime of any major economy in five years’ time”. He is already pledged to fund a 25p corporation tax rate by a process of simplification and Tory Treasurer Michael Spencer last week appeared to reveal Tory hopes to get the rate down to 20p by the end of a parliament.

Mr Osborne tells the FT that he and David Cameron have been talking to global entrepreneurs about how to attract business to the UK and are considering a range of measures that include a much friendlier regime for intellectual property and multinationals.

Aware of the damage done to him by the suggestion that he is a "40% Shadow Chancellor" (because he also serves as General Election Co-ordinator) he tells the FT that Philip Hammond, his powerful Deputy, is undertaking more of the "attack dog" role against Labour's economic record.

Tim Montgomerie

Accusing Labour of failing to fix the roof while the sun was shining doesn't begin to get to the scale of what Brown has done to Britain. On CentreRight on Friday, Neil O'Brien of Policy Exchange reminded us of the scale of Britain's fiscal challenge. Here are just four of the chilling facts he presented:

1. If current trends in borrowing continue for the rest of the financial year, Britain will be borrowing £9,500 every second.
2. £217bn of borrowing (what the Institute of Fiscal Studies fears may be this year's level of borrowing) equals 15% of GDP.
3. 9p in every pound of tax will soon be spent serving (NOT repaying) our debts. That's £50bn - more than we spend on schools.
4. Sweden turned round a similar deficit in seven years with a balance of spending cuts and tax rises. If we followed the Swedish path we'd need the equivalent of an eye-watering 20p increase in income tax to produce a budget surplus of 4% of national income.

It really is crazily irresponsible in this environment for politicians like Ed Balls to be campaigning for even more spending. The man really is unfit for office.

As I've noted elsewhere, I've been in the USA for a gathering of centre right politicians and think tanks. They were absolutely united in their belief that they were glad they didn't have Britain's fiscal problems. One member of Stephen Harper's government said that he wasn't sure that Britain could survive as a major power without a dramatic change of course. He also warned against one view within Team Cameron that Canada's approach to deficit reduction was a model; 'You do know a lot of our deficit was cured by transferring spending from Ottawa to the provinces, don't you?' I didn't.

Michael Portillo used an interview this weekend to say that spending cuts were too tricky. He clearly doesn't get the gravity of Britain's situation. On Thursday Benedict Brogan did get the measure of things:

"It is becoming increasingly apparent that nothing short of a national restoration project is needed, one that would rethink all our assumptions about how Britain works and our place in the world. The questions multiply by the day: If the City is no longer to be the engine of our growth, what replaces it? If the rise of new economic powers mean our capacity as a major player in defence and diplomacy is diminished, where do we stand? In a globalised world, why should we stay in the European Union? If individuals are empowered by the internet and the availability of information, how far back can the boundaries of the state be pushed? Can a broken Parliament be repaired in a 19th-century palace?"

On Marr this morning David Cameron indicated that an emergency budget would be held within fifty days of the Conservative Party being elected (should, I feel it necessary to add for Tom Harris MP's benefit, we get elected). It will be growth-orientated, Cameron said. It needs to be. Simply dividing up the existing cake won't solve things*.

Britain is already over-taxed and large tax rises will make our economy uncompetitive. Radical simplification of corporation tax is likely to feature in George Osborne's first budget but what other measures do we need?  Answering that question must be the focus of the last few months we have before polling day.

Tim Montgomerie

* The Archbishop of Canterbury's intervention this week in arguing against economic growth really did make me temporarily embarrassed to be an Anglican. Let me quote Edward Heath (not something I often do) to Dr Williams: "The alternative to expansion is not, as some occasionally seem to suppose, an England of quiet market towns linked only by steam trains puffing slowly and peacefully through green meadows. The alternative is slums, dangerous roads, old factories, cramped schools, stunted lives.”

Janet Daley and Pete Hoskin have questions after George Osborne's speech but Martin Kettle and Michael White at The Guardian are reassured.

Janet Daley is unimpressed with George Osborne's position on the 50p tax band: "Mr Osborne declared that he disliked the 50p tax rate on higher earners. But he would “not even think” of abolishing it for the time being, given that he would be expecting public sector workers who earned over £18000 per year, to accept a pay freeze. That he said “would be grossly unfair”. What he meant was that it would seem unfair. It would make the Conservative government appear to be doing a favour to the higher paid while it was holding down the earnings of public sector employees. But this is an argument that puts political appearances before economic truth: the 50p tax rate is actually likely to reduce revenue and repel investment. It is positively destructive to the hope of economic recovery. Will the Tories be prepared to fly in the face of economic reality for the sake of placating the public sector unions and the Guardian?"

Coffee House's Spectator thinks Osborne left a lot of questions unanswered: "The Tories were hawking this speech as one which would make their spending restraint plans a great deal clearer, and they're pushing the line that it would save £23 billion over the course of the next Parliament.  Which is welcome, in that every little helps in dealing with the debt crisis.  But it still leaves a lot of questions unanswered.  What about the other £billions upon £billions that will need to be saved? Just how will they cut the Whitehall bureaucracy by a third in four years?"

Martin Kettle in The Guardian: "Osborne's leitmotiv was "We're all in this together". He has to say this because too many people suspect it's not the Tory way. The Tories have to have an ironclad defence against the charge that they will always stand up for the rich against the poor in hard times. It sits uneasily with the priority that the party still attaches to scrapping inheritance tax – and which Osborne merely deferred for a year – most people aren't in that one together with the shadow chancellor and his family. But Osborne said enough about how burdens must be shared in the recession and in the face of government debt, for the overall case to be defensible."

The big theme of George Osborne's speech was that "we are all in this together". Illustrations of this pain for higher earners included retention of the 50p tax band for high earners, an end to certain benefits for those earning over £50K and a 5% cut in ministers' pay. Those earning less than £18K in the public sector will not be subject to a one year pay freeze. The pension age will go up one year earlier than first planned. The size of Whitehall will be cut by one-third.

Overall verdict: JUST ABOUT ENOUGH FOR NOW. This will reduce the deficit a little more quickly than Labour but not dramatically so. The missing ingredient is a growth agenda. At some point we'll need a list of policies that will move Britain away from the precipice (done today) and back to a fast growth economy.

Highlights, not verbatim:

12.27: We will pay for the relinkage of the basic state pension to earnings. We will however need to raise the retirement age earlier than expected. Already blogged here.

12.24: Child Trust Funds will continue to be paid to the poorest families but not to wealthier families. We cannot justify paying means-tested child credits to people earning over £50,000.

12.22: It would be "grossly unfair" to repeal the 50p tax rate on the high paid at the same time as poorer workers are making sacrifices.  For the fourth time he repeats the mantra: "We are all in this together."

12.18: We respect the people who work in the public services. At a time of crisis we have a difficult choice between protecting jobs and pay. Noone should pick on public employees and I will not ask them to make sacrifices that others in the private sector are not making. All public employees earning less than £18,000pa will be exempted - as will our troops in Afghanistan (who will get a doubling of their allowance) - but all others will face a one year pay freeze. This freeze will save 100,000 jobs.

12.14: Any suggestion that the modern Conservative Party will damage the public services is a shameful lie. We have become the party of the NHS and will increase funding year by year. But productivity is too low and we will reform the public services.

12.13: I can't write 2010 budget now but I can tell you what kind of fiscally responsible government will be. We will start at Westminster with a 10% reduction in the number of MPs and a 5% cut in ministers' pay. The next Conservative government will cut the cost of Whitehall by one-third. A £3bn saving in bureaucracy alone because "we are all in this together".

12.11: The Chancellor's decision to sneak out a policy of a public sector pay freeze during the Tory conference rather than having the guts to tell Labour delegates shows that Labour politicians are better at writing books about courage than displaying it.

Speaking at a Spectator conference George Osborne is about to claim credit for the Conservatives as stating the truth to voters about the spending cuts that are about to come.  The passage is worth quoting in full:

"Gordon Brown is on the eve of a complete capitulation.

Whether he hoists the white flag today at the TUC, or later at his Conference, or when Parliament returns, we will see.  But hoist that white flag he will.  For he and his style of politics have been comprehensively defeated.

And it is the Conservatives who have made the right judgement about the biggest economic question that faces this country.  We could have let it go.  We could have taken the easy route, ducked telling the public the truth, and avoided a pitched battle with our opponents on the same terrain on which our party had lost so often.
 
Or we could have the courage to say it as we saw it; to warn our country of the looming debt crisis; to tell the truth that spending will have to be cut whoever wins the election.

That is the hard path we chose.  For months we endured the onslaught of Gordon Brown and Labour Cabinet Ministers as they spoke in apocalyptic terms about what would happen if you cut spending.  Time and again this summer in the House of Commons, David Cameron fought back across the Dispatch Box and challenged the Prime Minister to tell the truth.

When people ask: are the Conservatives up to it?  I say, look how David Cameron and our party told the truth about the national debt, told the truth about public spending and won the biggest economic argument of the day."

Mr Osborne also used the speech to set out the Conservatives' broader economic policy message and, in particular, the three underpinnings of economic recovery.

Shadow Chancellor George Osborne has told The Guardian that large bonuses should be impossible in any financial institution that has received any sort of government guarantee:

"There are hundreds of billions of pounds of guarantees in existence: guarantees provided by the taxpayer to all banks, to guarantee inter-bank lending and the like. The reason those guarantees are in place is not so the bankers can pay themselves large bonuses. They are in place to keep a banking system afloat during a recession, and to allow the banks to rebuild their balance sheets, so they can function again, and start lending out in a normal fashion. If it's the case that banks are using those guarantees and actually engaging in pretty low-risk activity and making huge profits on the back of it, and then paying huge bonuses, I think action needs to be taken."

The Tory leadership is concerned at Labour attempts to paint the party as laissez-faire - Peter Mandelson tried it again on Wednesday.  A tough line on bank bonuses and the party's belief that the Bank of England should take charge of regulation are intended to counter this.