Adam Smith Institute

Talk of tax-cuts has caused a ripple of debate among Conservatives. While Labour and Liberal Democrat MP's and supporters appear to have tied their flag firmly to leaders Brown and Clegg – despite such policies being anathema to many – there is much debate within the Conservative movement on whether Cameron is treading too lightly in his tax promises. The back-and-forth between Guido Fawkes and Danny Finkelstein has so far been the most public example of this.

In reaction to Liberal Democrat and Labour promises of tax-cuts, the Conservatives have so far only promised to scrap National Insurance for one year for employers who hire new workers unemployed for three months or more. Lower spending on unemployment benefits would pay for this. Prior to this Cameron promised to freeze council tax by cutting back on government advertising and consultancy fees; as well as take the family home out of Inheritance Tax and nine out of ten first-time buyers out of Stamp Duty by introducing a levy on non-domiciles. Tax-cuts? Yes, but only just.

With the battle lines between Finkelstein and Guido firmly drawn, it is worth considering whether there is any way of reconciling their arguments. Essentially they disagree over what they consider to be the public's perception. Finklestein is arguing that the Conservative Party shouldn't offer tax-cuts because the public wouldn't trust them (especially with public services), whereas Guido postulates that the public is ready for a tax-cutting agenda. But perhaps there is another way of looking at the issue?

In this debate, Finklestein and Guido take tax-cuts as the starting point in their arguments, whereas if one starts with government waste then Finkelstein's fears can be allayed and Guido's desires met. Even taking the black hole of the NHS out of the equation, government waste is truly profound. If the Conservatives were true to their philosophy they would build the argument for tax-cuts on the back of a significant scaling back in the size of government. As such, they would claim to be the party whose tax-cuts add up, as opposed to the party loading up debt with a tax on the future.

Which begs the question: does the Conservative Party actually believe in smaller government?

I've done a few media appearances in the last couple of days talking about tax cuts – how nice to have them back on the agenda! What I've been saying, basically, is that while tax cuts are not a silver bullet, they are a vital part of fighting against recession. We should be using them to encourage economic activity and get the economy going again.

I've argued that the most important thing is to put more money back in people's pockets, both to make it easier for them to get by, but also so they can go out into the economy and spend it. We should raise the personal allowance as high as we can, and get VAT as low as possible.

But I've also made the point that investment, rather than consumption, is where real, sustainable economic growth comes from, so we should reduce the various taxes on that too. An added bonus is that these kinds of tax cuts tend to have the strongest pro-growth, 'laffer curve' effects, so revenue loss should be minimal.

At the same time, I've been saying that it is vital to encourage employment, and that the best way to do that is to reduce, or preferably abolish, employers' national insurance contributions – currently 12.8 percent of all earnings above £94 per week. Putting a tax on jobs is stupid at the best of times, but in a recession it's downright perverse.

I've been keen to stress that these tax cuts should be balanced by spending cuts, rather than more government borrowing (which is just a tax on the future). Every business and household in the country is looking to economize right now, and I don't see why government – with an annual budget of more than £600bn – should be any different.

You can hear me talking to John Humphreys on the Today Programme here.

Some Conservative Party advisors are determined not to repeat the tax cut pledges which they see as having counted against them in previous campaigns.  Afraid that Labour will accuse them of threatening funds for essential services, they are pledged instead to match Labour spending, even Labour's proposed spending levels.

It is time to revisit that pledge and polish it.  Times have changed, and polls show the country is now ready for tax cuts – not the fiddling around with the detail of tax credits, or some vastly complicated scheme that allows write-offs for selected businesses, but clear and visible tax cuts that people can understand.  John Key in New Zealand announced the dates on which he would cut people's taxes.  Barack Obama gave a ringing promise to cut the taxes of 95 percent of Americans.  Both won.

The Conservatives  can finesse the charge of threatening essential services by promising to match Labour on health and education, and make the savings elsewhere.  Many people might welcome a guarantee that no schools or hospitals would be closed without being replaced, but would not really mind if government spent less on five-a-day officers, real nappy officers, diversity officers and the like.  In fact during a recession, the chances are high that many people might prefer to spend such funds for themselves, thinking they could do it more wisely.

The mantra of matching Labour spending looks folly now that Labour have been exposed as spendthrifts, with consequences for all of us.  The mantra of no tax cuts looks silly now that people are demanding them and both Labour and Liberal parties are promising them.  Rather than refighting the last war on a totally altered battlefield, the Conservatives should revisit their tax pledge and polish it to reflect changed times.