Financial Times: Corin Taylor: Freeze spending and match the Irish on tax

A budget for 2008 has just been unveiled. It imposes a real-terms freeze in public spend- ing and uses the proceeds to reduce taxes dramatically. The president is brushing aside protests that the deficit should be dealt with first.

Which government could possibly be so bold? The Bush administration may spring to mind, but George W. has increased spending more than any US president since Lyndon Johnson. In fact, the country is much closer to the UK. Across the Channel, Nicolas Sarkozy is providing a fascinating lesson in how to make, and honour, manifesto commitments.

With the UK Treasury's three-year comprehensive spending review drawing ever closer, this tax-cutting tutorial from our French cousins could not come at a more appropriate time.

Britain's economy urgently needs a change of direction. Since 2000, public spending has increased faster than in any other Organisation for Economic Co-operation and Development country, without anywhere near commensurate improvements in public services, while the tax increases that have partly paid for Gordon Brown's largesse are leaving the UK economy at a growing competitive disadvantage.

The prospect of Britain overtaking France in the high-spending league - currently the UK's spending is 45 per cent of gross domestic product compared with France's 53 per cent - should sharpen the minds of those who see the spending review as a vital opportunity to improve public sector efficiency.

Controlling public expenditure in a serious way is not a unique proposition. Public spending as a share of GDP in Sweden is almost 20 percentage points lower than it was in the early 1990s. Similarly Ireland reduced public spending from more than 45 per cent of GDP 15 years ago to about one-third today. This allowed the main rate of corporation tax to fall to 12.5 per cent by 2003 and the resulting economic miracle is well known.

To be fair, Mr Brown has now woken up to the need for spending restraint. Public spending growth is likely to slow from its recent rapid rise. The March Budget projected spending to increase at about 2 per cent a year in real terms for the next three years - thus the new prime minister has tied the hands of Alistair Darling, his successor as chancellor.

Provided the credit crisis does not spill over into the real economy too much, that rate of spending growth should allow room for a very minor reduction in the tax burden. However, if the economy slows down (ING recently forecast growth of just 1.7 per cent next year), increasing spending by 2 per cent in real terms would mean tax rises or higher borrowing. It is a timid move compared with the French president's energetic reforming zeal.

If Mr Darling has any room for manoeuvre, he could do worse than consider following Mr Sarkozy's example. He would be surprised by how much he could achieve.

If the spending review announced that public spending would increase by no more than inflation for the next three years, close to £12bn annually would become available to reduce taxes. By 2010-11, it would be possible to cut the burden of taxation by about £35bn. According to the Revenue and Customs ready reckoner, this would be sufficient, in just three years, to enact pro-growth tax cuts such as reducing the main corporation tax rate from 28 per cent to the Irish rate of 12.5 per cent and reducing the basic rate of income tax by 3p in the pound, from 20 per cent to 17 per cent. The effect would be electrifying.

Britain's economy would reap the rewards of such bold fiscal policy. The TaxPayers' Alliance recently commissioned the Centre for Economics and Business Research to build a dynamic model of the UK economy, which better captures the behavioural effects of tax changes than the "static" models used by the Treasury. The model reveals that a phased reduction in the main rate of corporation tax to the Irish rate would deliver a 9 per cent boost to GDP, employment and disposable income and a 60 per cent boost to fixed investment, relative to the baseline forecast. Reducing the basic rate of income tax would add still further to the economic benefits.

It was not so long ago that spending restraint was consensus policy in Westminster. Kenneth Clarke, the former Tory chancellor, reduced public spending in real terms for two years, while Mr Brown almost froze expenditure for his first two years as chancellor. Now it is time to turn off the taps again.

The writer is research director at the TaxPayers' Alliance