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Promises, promises: Tory leadership candidates are horrifying Whitehall

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Walk down Horse Guards Road, pass the back entrance to Downing Street and the Foreign Office, enjoy the views across St James’s Park and approach the grand entrance to the Treasury. A soft, intermittent thudding sound becomes apparent, the sound of Treasury officials’ heads gently banging on desks as they listen to the promises being made by the contenders vying to become the new first Lord of the Treasury, better known as the prime minister.

Every now and then, there is a particularly big thud as another contender talks blithely about how a no-deal Brexit is nothing to fear. They know better, these civil servants charged with managing our economy and public finances. They’ve listened to experts and worked through the consequences, short and long term for our businesses and our trade and therefore for our incomes and our living standards. They are frightened in a way they haven’t been since the height of the financial crisis, horrified that potential prime ministers could seriously be contemplating risking inflicting such damage on the country.

Let’s join them, though, in pushing that thought to the back of our minds, believing in our heart of hearts, or at least hoping against hope, that this couldn’t really happen. That no government, no parliament, would be so careless of the national interest. Let’s focus, instead, on the steady rat-a-tat-tat of smaller thumps as they hear the various tax and spending promises pouring from the mouths of these contenders.

In the normal run of things, they’d be preparing for a spending review, these guardians of our public finances. After nearly a decade of austerity, they would even be looking forward to loosening the fiscal screws and, for the first time since the heady days of Gordon Brown’s largesse, finding some extra money for our hard-pressed public services.

What they will want from the new prime minister and chancellor is some guidance as to what the rules of the fiscal game will be. Will they be committed to the Conservative manifesto promise to get to a balanced budget by the mid-2020s? My guess is not. Even our rather hawkish chancellor is not taking that target terribly seriously. An alternative rule would be to ensure that debt continues to fall as a fraction of national income. That might allow an additional £15 billion a year or so of borrowing compared with present plans — assuming that we manage the modest rate of economic growth currently forecast by the Office for Budget Responsibility.

There is a case to be made for either a looser or a tighter fiscal policy than that. In more serious times, we might expect that to be one of the central points of debate between candidates for the most powerful office in the land. We might expect some to make the principled case on one side and some on the other. I may well be doing one or more of the candidates a disservice (it’s hard to keep on top of all the utterances of all 11 declared runners), but we’ve not seen much of that so far. Rather we’ve seen a bidding war for specific tax cuts and spending increases.

Until this weekend the biggest I’d seen (again, I may have missed something) have come from Dominic Raab and Jeremy Hunt. The former wants to spend well in excess of £30 billion a year on cutting income tax and national insurance contributions. That certainly would rule out any end of austerity on the spending side if he wanted to keep a lid on national debt, though perhaps he is after a more generally expansionary fiscal policy. If so, I don’t think he’s made that clear.

Mr Hunt, on the other hand, has talked about dramatic increases in defence spending, saying that it should rise decisively as a fraction of national income. Each additional 1 per cent costs £20 billion a year. Again, whether he would fund this from higher taxes, higher borrowing or lower spending on health, education or something else he has not made clear. If we were to increase defence spending in this way, it would represent a dramatic break with recent decades. It is no exaggeration to say that continued falls in defence spending as a fraction of national income over a 60-year period have been central to allowing us to increase spending on health and other parts of the welfare state without significant rises in tax.

Michael Gove has now entered the tax and spending fray, illustrating his continued lack of interest in the advice of experts by suggesting that he’d like to abolish VAT. This tax raises nearly £140 billion a year. He’d like to replace it with a sales tax. That would be the biggest, riskiest and most disruptive change in the tax system in at least half a century. He might like to ask himself why the biggest global change in tax in recent decades has seen countries around the world moving in precisely the opposite direction, why every OECD country bar the United States and why 166 countries now have VAT.

All this and the starting gun on the contest was formally fired only on Friday and I’ve not mentioned the more and less specific proposals from the eight other hopefuls. But whatever they promise over the next few weeks, the winner and their chosen chancellor are going to have to work with Treasury officials to run a spending review and deliver a budget before the year is out.

I know that everything pales into insignificance next to Brexit, but other things do still matter and few things matter more than clarity over fiscal and economic strategy. We really should know a little more about where our potential future leaders stand on them.

This article was originally published in The Times and is reproduced here with full permission. Paul Johnson is director of the Institute for Fiscal Studies. Follow him on @PJTheEconomist.