Michael Brown: The real clash within the Tories is just beginning

The tussle over tax, delayed since Cameron's election, must now be played out

Both Tories and Labour are missing the point about tax. The simple verity of the Thatcher tax policies of the 1980s has not changed. Tax cuts lead to economic growth. Tax rises, however, reduce the impact of economic growth.

Yet both parties claim that the country cannot afford "unfunded" tax cuts. Labour says the Tories are still on their slash and burn policies that would, if they implement Lord Forsyth's tax commission proposals in full, imply a cut in public services of £21bn. But public services are not ultimately paid for by our taxes; they are actually paid for only by a growing economy.

George Osborne replies that any tax cut recommended by the commission would only be implemented with a commensurate rise in environmental taxes. This is just plain daft. It means that the tax burden under the Tories would continue to be the same as under Labour - nearly as high as in the days of Denis Healey.

But the question is not whether the country can afford tax cuts. The country can no longer afford to pay the taxes demanded by government from the population. Britain's tax burden is growing faster than that of any other European country, with middle-class taxpayers working nearly half the year for the state. Failure to reduce, simplify and make fairer the burden and collection of taxes is actually reducing economic activity, lowering economic growth - and even reducing the total amount of revenue collected.

However much both parties want to shy away from the Thatcher tax policies of the 1980s, the experience of that era continues to provide the only basis for future economic growth. At a time when our taxes - corporate and personal - are increasing, the rest of the developed world is going in the opposite direction. Which means that we are becoming progressively less competitive.

Perhaps the starkest comment in Lord Forsyth's report is the quotation from Charlie McCreevy, the EU Commissioner for the Internal Market and Services, who was previously the Irish Finance Minister. "Back in the 1990s, when I started cutting taxes, many people feared that the loss of revenue to the Exchequer would be massive and that the policy would have to be abandoned. But the opposite happened. Far from the policy causing an erosion of the Exchequer's revenue stream, reduced tax rates generated higher economic activity, greater taxpayer compliance and a surge in the tax take for the Exchequer."

This was precisely the experience of the UK during the previous decade under Thatcher, Howe and Lawson. After Geoffrey Howe reduced top rates and marginal rates of tax, revenue increased. And after Nigel Lawson's 1988 Budget reduced the top rate of tax to 40 per cent, the public sector borrowing requirement was converted to the public sector "debt repayment".

Both Labour and the Tories now seem to be stuck in the groove of "economic stability". George Osborne repeats the words as his central mantra. But there is nothing stable about economic stability. Such a policy is actually harmful to the British economy, impairing its competitiveness while reducing growth and opportunity for individuals and families. Without reform, according to Lord Forsyth, it will only get worse.

The political issues raised by the commission will spark a debate that can no longer be conducted behind closed doors. The right-wing groups comprising John Redwood's No Turning Back organisation, as well as the Thatcherite Conservative Way Forward - presided over by Lord Tebbit - will want to ensure that the uneasy truce with the Cameroons is broken. This tussle over tax cuts has been delayed since Mr Cameron's election, but will now have to be played out and resolved before next year's party conference.

Already, well-known right wingers such as Edward Leigh, Chairman of the Public Accounts Committee, and the Eurosceptic former minister David Heathcoat Amory have enthusiastically embraced the commission's proposals. Mr Cameron would be ill advised to write off these and others (probably a majority of the backbenchers) as Thatcherite dinosaurs that can simply be ignored. Expect to read of serious rows within the backbench 1922 Committee over the coming weeks.

Every Tory leader since 1997 has had to face a fork in the road after about a year in office. Mr Cameron made it clear in his party conference speech at Bournemouth that there would be no return to tax cutting unless it could be afforded. Last year's battle for the party leadership may be over, but the real battle for the soul of the party is only just beginning.

mrbrown@talktalk.net