Nick Wood: Tory tax creed is more plausible than it sounds

Yesterday, as Oliver Letwin rose to his feet in Millbank Tower, I asked a battle-hardened former Tory strategist what he made of the Shadow Chancellor's newly minted promise to cut taxes while spending more money on the sacred cows of schools and hospitals.

"Look," he said, "I have sat through enough focus groups of swing voters to know that they just don't believe it. They don't think it is possible to raise spending and cut taxes at the same time."

And there, of course, is the central political challenge posed by Letwin's erudite and intellectually rigorous speech on future Conservative economic policy delivered in the skyscraper that was once temple of spin to New Labour. How are the Tories to sell their "you can have it all" message to the public?

To cut a long and mathematical story short, Letwin is right. Taken across the decades and centuries, the British economy grows. The present Government (and historically most Labour governments) spend the growth and then some on the public sector. Eventually deficits soar, the public sector fails to deliver, taxes rise (again), and the poor bloody taxpayer cries enough and turns to the Tories.

But how far are we down the road to national ruin? I suspect - as do many Tory insiders - that we have not yet reached the tipping point on tax. Low inflation, cheap mortgages and high rates of employment make it that much harder for Letwin and Michael Howard to wheel out the old Labour tax bombshell posters and terrify voters into the Tory camp.

Instead, as Letwin rightly indicated yesterday, a more subtle message must be advanced. Over the next six years, under Gordon Brown's current plans, state spending is set to rise by £75bn; under the Conservatives, it will still rise - but by a more modest £40bn, leaving £35bn to be "shared" with the country in the form of tax cuts and/or reductions in Mr Brown's extravagant borrowing. Health and education can be safeguarded while spending on less popular programmes is squeezed.

Fair enough - but how do you sum that up in a headline, a soundbite or a slogan? Take yesterday's newspapers, accurately speculating on the Letwin speech: "Tories to lavish more on schools and hospitals - but still curb spending" (the Daily Mail); "Tories say plans on education and health will allow changes" (The Times); "Tories pledge to cut budget but spend more on key services" (The Independent). Not easy, is it? All three fail the focus group test.

But Letwin is onto something, even if the massed ranks of taxpayers are yet to tear down the gates of Downing Street. Taxes in Britain have risen, are rising and will rise whatever the Labour dirty tricks department leaks or spins. After 60 Labour tax rises, a £600 increase for the average family this year alone, and warnings of worse to come from independent experts such as the Institute of Fiscal Studies, everyone knows that under a third-term Blair government taxes are a one-way bet.

And nor should anyone allow the Shadow Chancellor's donnish manner to blind them to his political skills. OK, in an excessive fit of neighbourliness, he lets a man into his house at 5am to use the loo only to find that he has left with his wallet; OK, he lets his intellectual honesty run away with him and admits - in the 2001 election - that the William Hague plan for £8bn of tax cuts really equates to £20bn; OK, he has been branded the Tories' "Hampstead Liberal" by Shadow Cabinet bruiser David Davis.

Less well known is the fact that Letwin's most prized possession is a monstrous Havana cigar, given to him by Fidel Castro, for helping to privatise the Cuban telephone service in his days as a senior adviser to merchant bank Rothschild. He also once clocked up a million air miles commuting from England to New Zealand, again in literal pursuit of telephone numbers on behalf of his bosses.

Some people on the Tory Right will be disappointed that he has not gone further down the tax-cutting road, but at last we have some clear blue water between the two main parties over tax and spend. And not only on the numbers front. The Conservatives, as Letwin made clear yesterday intend to ally their tighter approach to overall public expenditure totals with radical reform of the public services so that private money, choice and competition between state and non-state providers becomes part of the mix.

Everyone should welcome that - even people on the Left. For democracy's sake, it is important that the public is presented with clear choices over tax and spend at the next election.

No, the central problem with Letwin's speech yesterday is presentational. Before a key speech or interview, I always used to ask the likes of Hague and Duncan Smith what headline they wanted. How about them reporting what I say, was the typical reply. But it is more complicated than that. The Conservatives need a soundbite to encapsulate the seeming contradiction between spending more money on things that matter to people while cutting the overall burden of taxation.

Blair managed to cut through on the complex territory of law and order with his "Tough on Crime, Tough on the Causes of Crime" mantra. The Letwin creed cries out for similar treatment.

The author was Conservative Media Director 2001-2003