EXCLUSIVE: We might cut public spending and raise taxes, says Ken Clarke

27 January 2009

In the second part of his report from a Nottingham University seminar on a potential Tory government, Rory Baxter also hears the shadow Business Secretary call encouraging marriage through the tax system 'social engineering'

Encouraging marriage through the tax system is social engineering and Conservatives should be against it, the former Chancellor of the Exchequer and recently appointed shadow Business Secretary Ken Clarke has said. He also warned that the Tories may have no choice but to "put up taxes and cut public spending pretty drastically" and he admitted that although he initially supported a cut in VAT, it doesn't seem to be providing the big fiscal stimulus that he anticipated.

Clarke was speaking at an academic seminar at Nottingham University held in December last year which looked at whether the Conservatives were ready for power and what policies they should promote.

Calling himself a pragmatic politician who believes in free market economics with a social conscience – or "enlightened social reform" – Clarke said: "I got rid of the married couples allowance [when I was Chancellor]… I really don't think it's anything to do with politicians whether you [get married] and most of the younger people I know don't seem very keen on it. My view of Conservatism is that it's not for us to tell you [what to do through] the tax system – my wife didn't put up with me because I was getting £150 by way of tax allowance. This is social engineering for God's sake and when I joined the party we weren't in favour of it."

He went on: "But what I am in favour of is David [Cameron] setting an agenda pointing out all the social problems, the broken parts of cities, the level of family breakdown, poverty, social disorder and crime. I'm glad to see us getting into all that but the stuff I associate with the religious right in America, I think, is having too much influence on where we are."

However, the whole married couples issue could well be killed off by the financial crisis, Clarke suggested, because if he's the next Chancellor of the Exchequer George Osborne will almost certainly have no money for such a proposal.

Clarke then dealt with the thorny issue of public spending cuts, which Labour has claimed the Tories are proposing while the government is planning increased expenditure. Pointing out that the government's stance doesn't make sense, Clarke warned that the current financial crisis "may mean that, as sensible people on both sides will know, whoever wins the election is going to have to put up taxes and cut public spending pretty drastically".

"That's what I did," he said, referring to 1979, the year when Margaret Thatcher took the Tories into power, "and I inherited a fiscal mess that was a baby compared with this one. It may not be necessary but if the fiscal burden is half as bad as it looks as though it's going to be ..."

Responding to Labour taunts that the Conservatives are a "do nothing" party, Clarke went on: "I don't think my colleagues have been slow, they were on to recapitalising the banks before the government was, they're saying all the right things about guarantees, and they've been quite right on the level of public spending. Gordon will suggest anybody else talking about public spending means starving policemen and redundant nurses … but if the government says [spending plans are still] affordable then are they saying this crisis has made no difference? Just carry on, public spending will remain unchanged? Get Gordon Brown to explain this – given that we've gone through a financial calamity, why do you say we can still afford the same level of public spending that you were saying you could afford 18 months ago?"

Clarke said it was ironic that all Conservatives support the government's views on welfare reform but he's "astonished" that the government is going ahead with it. "It would have caused riots if we'd proposed it," he said, asking: "But how can you afford it because the costs are ... expensive in the long-term?"

Clarke said the current crisis reminded him "a lot" of 1979. "You had a broken government going through a disastrous experience," he said. "Callaghan was a very good Prime Minister with an impossible set of cards to play with. After the IMF crisis he was obviously not going to win … if Callaghan had called the election earlier he wouldn't have won but he would have done better than he did waiting for the trade unions to blow him out of the water in the winter of discontent. Then we took over a horrible, horrible mess."

Clarke reckoned that Gordon Brown was "playing everything" to try to hold an election in Spring this year, which from his point of view would be "sensible", but it's more likely that he will have to go the full term. Clarke said: "If only he can pose as the father of the nation, the wise Scotsman who can weather the storm and take us through these hard times and get it over with before the recession goes on and on and on ... but it's not going to work."

The MP for Rushcliffe added: "It seems to me fairly obvious that for the foreseeable future the economic crisis is going to dominate political debate and decision making. One of the many worrying features about the current economic crisis is the total uncertainty. Nobody has the first idea exactly how deep or how long it will be or when any signs of recovery will come. My feeling is that we are in the early stages of recession, it's going to be the worst of my lifetime and 2009 is unfortunately – and I hope I'm wrong – going to be very bad for a lot of people. And there's absolutely no doubt that against that background it will just change the whole political climate."

While admitting that it was "slightly mad" to anticipate the theme of an election 18 months away, Clarke said: "I can't help thinking that economic policy is going to dominate it and if it does I think it will sweep the government out for a variety of reasons, not least that [this crisis] has shot Gordon Brown's great claim to fame which was his reputation as Chancellor. He can struggle around like the Wilson-Callaghan government did and try to rebuild all this but he's had it."

Appearing almost dumbfounded by the current economic situation which was essentially a banking and credit crisis, Clarke said that "everything has been tried" to tackle it but recapitalisation has clearly not worked, it is just "not sufficient" and "classic monetary policy with interest rates doesn't make any difference at the moment". He added that the rate set by the Bank of England has little or nothing to do with the availability of credit or what people have to pay for it. Then he turned to value added tax.

"I did go on record as saying if you can afford it the best fiscal stimulus is a VAT cut," he said, "[but] with big ticket items, which is where the economy has gone dead, it's no good taking 2½ per cent off the price of a car, it makes no difference because nobody's selling cars at the moment. The sale of big ticket items only comes if the policy works and you reach the stage where the tax is going up again. People might think of changing their car if they know the rate is going up to 18 per cent and then 20 per cent in 2010." This would create a big stimulus in short-term spending, Clarke predicted, but it would slow down any recovery. "I think the recovery is going to be painful and slow. The problem of a sterling collapse is very real – where interest rates are going to go as we try to finance all this debt I have no idea but people are not falling over themselves to buy sterling denominated assets of any kind."

Finally, Clarke offered some advice to the Tory party – and probably to opposition parties in general – while the government in office is facing a major crisis and a very difficult time: "Try to minimise the number of stupid promises you make and don't allow the media to keep dragging you into producing marvellous new schemes and policies every month as a cure for the problem because they will probably get shot apart and they will certainly be no use at all."