Callum Price: Fiscal conservatism needs a revamp, because it may sound grey but it’s what we need

Callum Price is Director of Communications at the Institute of Economic Affairs.

There may yet be hope for the Tories. Though it may not feel like it for many Conservative Home readers at the moment given recent events.

We all get absorbed by the cut and thrust of day-to-day party politics, and while it does matter – a lot – I happen to believe that ideas and policy are ultimately the great arbiter of success in politics. It’s why I work at a think tank.

And there is one idea that is going to matter more and more over the coming months and years. It isn’t a new idea, and it certainly isn’t an exciting idea, but it is an important idea. The idea is fiscal conservatism.

The size of our state and the scale of Government spending is barely fathomable, and entirely unsustainable.

The national debt has skyrocketed in the aftermath of Covid to 100 per cent of GDP. Just paying the interest on that debt costs more than we spend on the police, justice system and defence combined. Forty per cent of spending goes on health and welfare, including pensions.

These are not costs that are on a downward trajectory. Our population is getting older, which not only means more pensions and more healthcare to fund, but fewer working-age people to do the funding.

This is both a long term and a short-term problem. You don’t need to read this column to know that the Chancellor is in a sticky situation this autumn. She has (another) fiscal black hole to fill to meet her spending rules and keep the markets at bay. But she has two more shackles pinning her down.

The first, her promise to not tax working people, which leaves very little room for manoeuvre.

The second, her backbenchers, who refuse to countenance any form of spending cuts.

They have already demonstrated their ability to force u-turns from the Government despite its sizeable majority. We wait with bated breath for the end of November to see how she wriggles her way out of this one, like an extremely disappointing James Bond film. But few are under any illusion that, if she manages to, it will be with a popular, productive, or sustainable long-term solution.

Meanwhile, Reform continue to swallow up Labour’s old poll lead.

Their own fiscal plans and priorities are somewhat less clear. Their 2024 manifesto promised plenty of tax cuts funded largely by cutting things they don’t like anyway – including net zero, DEI requirements, and other general wastage. But that was a long time (and a lot of defections) ago, so it may be unfair to hold them to those exact promises.

However, what they have promised since does not scream fiscal prudence. They have supported scrapping the two-child benefit cap and more tax cuts to boot.  This is where the hope for the Conservatives may lie, in being the only party who demonstrably cares about fiscal responsibility.

Badenoch’s recent attempts to offer Starmer help with welfare cuts ‘in the national interest’ was a shrewd move, demonstrating both the importance of the issue and the differences between her and Starmer on it.  Historically, the Conservative Party has performed quite well when playing the boring, grey-suited, ‘actually we can’t afford that’ party. It chimes with the British public, most of whom have to manage their own finances and make difficult decisions about what they can and can’t afford.

Opponents of this view will cry that this is the ‘household fallacy’; that governments are different to households, and the same rules don’t apply. In some ways, this is right – if I need more money to pay the bills, I can’t just go and take it off my neighbour without consequence. And because I can’t, it costs me more to borrow money.

But in other ways, the household fallacy is a fallacy in itself.  The ability for the government to raise more money in taxes is not unconstrained, it will top out – especially in a competitive global environment when people can up sticks and leave relatively easily.

And this means that the government’s ability to borrow also isn’t limitless. Like a household, it only extends as far as the creditors believe they will see a return on their investment. One look at the direction of UK borrowing costs recently, and it is clear that faith is already being tested.

Of course, some will argue, the government can always print money to pay back the lenders. But unless we want to follow Zimbabwe and Venezuela, this is best avoided.

Others will argue that government spending is an economic stimulus, so it can spend its way out of trouble. But even if this was right it would only be true in a recession.

Given the scale of our fiscal trouble, and it only going in one direction, it is not outlandish to believe that the Conservatives will see some electoral benefit by being the only ones willing to stand up and say ‘sorry, no’. But to be credible about it, they have to take that approach across the board.

Voters aren’t stupid, and they will see through the safe-pair-of-hands act if it doesn’t apply consistently. That means it must extend beyond cutting the ballooning welfare bill, to also tackling the ballooning pensioner benefits bill – triple lock first and foremost.

This is where electoral incentives may diverge, because pensioners also care about their incomes, and they vote.

Tackling this bill will not be an easy problem to solve or message to land. But there may be hope that with consistency and clarity about the need to control spending, set to the backdrop of an ever-worsening economic picture, the party who chooses fiscal responsibility will be rewarded.

But maybe that’s why I work at a think tank.