Having known Sir Oliver Letwin for nearly 25 years, and worked with him on and off for ten, it’s always been a joy to sit down with this most engaging (if donnish) politician, and discuss policy matters with an intellectual rigour that is absent from conversations with most MPs. Having been an adviser to both Keith Joseph and Margaret Thatcher, lost in general elections to Diane Abbott and Glenda Jackson, privatised the world as a merchant banker for Rothschilds, served as shadow home secretary, shadow chancellor and (briefly) minister for Brexit, and been a central (if largely hidden) figure of the David Cameron government, there was much to discuss.
It is no surprise, then, that our wide-ranging discussion bounded between the challenges the current chancellor faces in his Budget next week, the Brexit negotiations, the possibility of a hypothecated tax for the NHS and social care and the design characteristics necessary in a modern taxation system fit for a digitalised economy. Perhaps most illuminating of all, however, was Letwin’s reflection that tax policy is not purely a matter of technical analysis and scientific application; political persuasion and being on the right side of what public perceives to be true and fair are equally important.
I started by asking Letwin what he would do if he were chancellor today. Given our current political climate, no one will be surprised at his note of extreme caution about short-term commitments: ‘Not very much, because I think the situation at the moment is necessarily very uncertain.’ Whatever their political persuasion, any chancellor needs to preserve the maximum room for manoeuvre during what Letwin labelled ‘the great Brexit negotiations’.
But these immediate limitations do not prevent Letwin from holding clear, and quite radical, views about other elements of our fiscal life. The pressures on our public services – health and social care, schools and children’s services – mean that ‘we should be thinking about fundamentally altering the way we go about allocating funds, in particular to health and social care’. Demographic factors and the advances in medicine both make it an inevitability that the cost of providing such services will rise for many decades to come. ‘The way to get maximum efficiency at the least cost is to plan considerably ahead.’
Hypothecated taxation for a national fund
Furnished with ‘a magic wand’, Letwin tells me that he would establish a national fund to cover the NHS and adult social care as a single issue, creating alongside an independent body (rather like the NPC or the Climate Change Committee) to determine our needs based on health economics and demography, and looking five, ten or even 15 years ahead. Magic wand aside, this is no pipe dream for Letwin, but as always its success comes down to money. ‘We need to set hypothecated tax levels that are devoted to these purposes only, and are sufficient to fund what those needs are.’
Such a national fund would create an intrinsically balanced budget for healthcare, thereby dropping it out of the fiscal equation as far as the public sector net cash requirement is concerned. Year by year, the amount raised must be sufficient to meet the needs of the NHS, as ascertained by the independent body. While Letwin concedes that there can be inter-year adjustments, all NHS provisions must be met by the fund. ‘If you find that you’re not raising what you expected and needed, then you’ll have to increase the rate.’
‘Hard’ hypothecation is, he believes, a necessary tool to gain public acceptance of the progressive tax rises needed for such a fund. The source of taxation is less certain, and Letwin welcomes a debate once the principle of the national fund is established. ‘But my inclination, without being dogmatically attached to it, is to think that the core of this is probably national insurance.’
Fundamental problems are, he believes, affecting the success of the NI scheme at present. The increase in life expectancy means that pension provision is insufficient to enable people to retire ‘at what used to be regarded as the pension age’. Meanwhile, the ‘very, very many people’ working past their retirement age are exempt from national insurance on their pensionable income. A more rational distribution of the burden is essential.
Letwin would not seek to increase taxes on accumulated savings, preferring to encourage investment in ‘entrepreneurial activity and business and so on’. Where the result of such activity is high income and high expenditure, however, he believes that people should be taxed accordingly; and that those who have less should be taxed less. ‘My feeling is that, actually, it’s fairer and more desirable from the point of view of the operation of the economy to try to place more of the burden on expenditure and income in proportion to the size of people’s expenditure and income.’
Not surprisingly, Letwin is supportive of the significant reductions in corporation tax from 28% in 2008 to the current 19%, and the further reduction to 17% in April 2020. ‘Britain should be a place in which people are encouraged to establish and invest in business by having as low a level of corporation tax as is fiscally feasible.’ If the UK can succeed in attracting more businesses by reducing corporation tax, Letwin believes that the net tax take is likely to increase.
Caution creeps in, though, when he talks about the ‘significant part of total business activity that is being conducted in cyberspace’, as the companies conducting such business can ‘manage their tax affairs virtually without making a contribution’. The goal, he believes, must be to have a low corporation tax base but to ‘capture the proper contributions from businesses that, at the moment, are so structured that they get out of it altogether’. There is then a need for some form of digital services tax, ‘not just here but around the world’. It is, he admits, not an easy thing to do.
Letwin is pragmatic about such complications, however, reminding me that ‘every sophisticated modern country has a problem with excessively complicated tax legislation’. The very act of trying to close off loopholes creates more loopholes, which creates more closures and more complexity. ‘We are condemned to having a complicated tax system. I don’t think that’s the worst thing in the world.’
In some ways, that complexity can work to our advantage. ‘There’s a process of continuous adjustment.’ If a particular set of reliefs, for example, isn’t working, you can adjust them. Even if that’s inefficient, the process of trial and error, if it’s carefully done, can be a ‘perfectly reasonably system of government’, Letwin believes. He just wishes that the media was a little more open to such adjustments.
Speaking with Letwin, it seems at times that striking the correct balance between tax and revenue is as much an art as a science. ‘The fundamental conception of the Laffer curve must be right,’ he admits. If you set a zero tax, you will get zero revenue; and if you set 100% tax you will probably also get zero revenue. ‘But just what the shape of the curve is at any point is…’ He pauses here, looking for the best way to illustrate his point. ‘A space time curvature issue and jolly complicated.’
Complicated or not, there are times when the effect of changes to tax policy can be clear. When Margaret Thatcher reduced the top rate of income tax from 80% to 40%, Letwin says, ‘it’s not a coincidence that pretty shortly thereafter, and very persistently thereafter, the take from top rate tax persistently increased’.
To Letwin’s mind, though, Ireland is perhaps a more interesting example. Both the UK and Ireland have been EU members for a long time now, but have taken very different approaches. ‘Ireland adopted a consciously low tax policy for business and capital. It did some other things too, its tax policy isn’t the only cause. But I find it remarkable how few people in the UK realise that Ireland is now 40% better off in terms of per capita GDP than the UK is.’ The country that we used to think of as a sort of unfortunate cousin, Letwin points out, is now the rich cousin.
Letwin held the post of shadow chancellor from November 2003 to May 2005. Clearly, enough time has passed for him to look back at his experiences with a degree of humour, and I reminded him of one of my favourite lines from his recent semi-memoir, semi-political history book, Hearts and minds: The battle for the Conservative party from Thatcher to the present: ‘Michael [Howard] asked me to be shadow chancellor. Unfortunately, I made the mistake of accepting. It seemed like a good idea at the time.’
Letwin speaks of his time in opposition to home secretary David Blunkett and secretary of state for the environment Margaret Beckett rather fondly, but he holds no illusions about where it all went wrong for him as shadow chancellor. ‘In two words: Gordon Brown. I was consistently battered into smithereens by his battering ram.’
Letwin stands by his view that Brown ‘was overspending significantly and overborrowing significantly’, but admits that his opinions made ‘absolutely no impact on the public’. The Conservatives went into the 2005 election with a set of propositions which, in retrospect, he believes were too modest and not sufficiently well presented. ‘It would’ve required more political cunning than I was able to muster to find a way of persuading the public to see what I think the truth was and what the truth turned out to be.’
Letwin seems more optimistic about the future, though his message is tied the fundamental importance of presentation. Whatever its intellectual complexities, tax policy cannot be separated from how it is perceived on the doorstep. At the most basic level, Letwin explains, the eponymous Mrs Jones has all sorts of complaints about the money that is being taken away from her, or that she’s not receiving enough in terms of benefits. ‘But actually, when you have just a little bit more conversation with Mrs Jones, you almost always find that her main complaint is that she’s paying her council tax, and she can’t see which services she’s getting for it.’
That is, says Letwin, a pretty natural human reaction. There is a fundamental need to see a direct relationship between what we pay and what we receive for it. ‘If you’re handing over some money and you can’t see what you’ve bought, it strikes you as inept, not to say outrageous.’
And this is where our current tax policy is, in Letwin’s words, ‘being incredibly obtuse’. It brings him back full circle to his goal of a hypothecated tax for NHS and social care funding. ‘I really do believe that if people knew that whatever number of pence in the pound they were paying for the NHS and social care really was 100% guaranteed, cast-iron, legislated – if it was a criminal offence to put it anywhere else, and being paid into this fund for that purpose only… Then if they were told they had to pay a bit more – well, they’d grumble but they’d think it was fair.’
On this topic, he feels he is winning the argument in Parliament. ‘We have a pretty wide consensus of everyone except the two front benches. But we’ll get there. I mean, we’re bound to get there because it’s just obviously right.’
