Tax and Fiscal Policy

The second urgent election issue on which the parties are silent. Where will they make most of their cuts?

We should have called 2010 ‘The Phoney Election’. Right up until polling day, our wannabe political leaders were debating the desirability of £6 billion worth of ‘efficiency savings’ in the first year of the Parliament. At the time we had a deficit of £160 billion. The Financial Times tried to inject some honesty into the debate by laying out a list of the sort of, and scale of, policies that any party would have to adopt given they had all committed to significant deficit reduction. Nobody took up the mantle. In short, the politicians preferred to talk in generalities about deficit reduction, but not on the specifics of how to achieve it.

Are we headed for a repeat of this debate in 2015? The Taxpayers’ Alliance seems to think so. In their ‘Spending Plan’, released today, they outline a range of cuts which would allow the Chancellor to achieve the OBR’s projection of government spending at 35.1 per cent of GDP by the end of the next Parliament and call on the parties to lay out their plans in a similarly detailed way.

Even if one doesn’t agree with all of their recommendations (disclaimer: I agree with most, but not all of them), one is struck by how ‘way out’ the recommendations seem compared to the discourse that we’re having. Cutting spending by £50 billion by the end of the next Parliament would necessitate, for example: abolishing three government departments, child benefit, free TV licences, the triple-lock and national pay bargaining, as well as means-testing winter fuel payments, reducing Scotland’s grant, and fundamentally liberalising planning laws.

Now, it’s not entirely clear, of course, that even the Conservatives intend to, or indeed will, cut spending by £50 billion. Their proposed fiscal rules give them sufficient flexibility that they may only have to cut spending by circa £30 billion, according to the IFS. For Labour, their rules imply that spending might only have to be cut by £6.8 billion. But with a host of other tax promises already made and more likely to rear their heads in the coming weeks, we’re almost certainly talking tens of billions of pounds of spending restraint from either main party.

Politicians know what they are doing electorally. They realise that spending cuts are popular in the abstract, and less popular when you highlight who is losing money. We often delude ourselves into thinking that there is a potential untapped ‘honesty premium’ – a first mover advantage for someone who’s going to spell out exactly where spending will be cut. Well, guess what: polling data suggests otherwise! Perhaps then the best we can hope for is the sort of indications of broad areas where money will be saved which we have seen so far.

In Ed Balls’ speech on Monday he outlined just £1.3 billion of very specific spending cuts, however. This included £100 million saved from means-testing winter fuel payments, £100 million from capping child benefit increases to one per cent per year for two years, and a range of savings to specific budgets (including policing, DCLG, courts, free schools and defence).

Much more of Labour’s consolidation is due to come from tax rises. Labour are still claiming £3 billion could be raised from reinstalling the 50p rate, despite the best evidence suggesting it would raise circa £100 million. £2 billion more will apparently be raised from the Mansion Tax, and then lots from a range of other restrictions on reliefs, clampdowns on avoidance etc. They have of course made a range of other spending and tax commitments which partly offset any savings here – in particular, significantly higher spending on the NHS, a new 10p tax band, a freeze in business rates and more ‘free’ childcare. There is therefore still a significant gap between their ambitions and their outlined policies.

The Conservatives have outlined very broadly where they would make savings, and are relying on their credibility for having delivered on what they promised on spending (if not the deficit) in this Parliament to see them through without spelling out exactly where the axe will fall.

So, they’ve committed to £12 billion of savings from the working-age welfare budget, for example, but only indicated how less than a third of that will be saved: lowering the benefit cap, freezing all working age benefits for two years, restricting housing benefit for 18-21 year olds. There’s also been recent chatter about restricting child benefit to three children. Even with this, this tots up to about £3.8 billion, leaving another £8.2 billion in welfare savings unidentified. Assuming these are delivered, that still leaves at least £13 billion to cut from other departments (provided the government miraculously obtains the £5 billion promised from clamping down on tax avoidance and assuming that none of the tax cut pledges are delivered!)

That’s where we are. But where should the axe be falling? I’ve long argued that it seems unjustifiable to protect the whole pensioner policy framework as has been seen in this Parliament. Almost £7 billion could be saved by the end of the next Parliament by abolishing the triple lock and instead just linking to prices. Without doing so, the triple-lock is a promise to ratchet up state pension spending as a proportion of GDP. More still could be saved if the state pension and other pensioner benefits were only increased by 1 per cent for two years, as will happen with working age benefits.

Furthermore, the universal pensioner benefits we currently see have no rationale. At worst, these should be rolled into the state pension. At best, they should be means-tested first with the lowest income compensated for their loss through pension credits. Given the demographic outlook, even small changes to these areas can have significant beneficial effects on our long-term debt dynamic.

In a range of other areas, there are large potential savings to be made if only government supply-side policy was coordinated with aims for savings. Radical planning liberalisation could facilitate housebuilding to make a significant dent in the £24 billion housing benefit bill. The £7 billion subsidies on childcare could be rationalised if only the sector was deregulated with assistance targeted to just those with low labour market attachment.

Unfortunately, these sort of big ticket items don’t seem to be on the agenda. It seems that we will go into the election with both parties being specific on many small items but unspecific on big cuts to certain departments. It seems that the Conservatives will largely follow the agenda of this Parliament: ring-fencing large areas, protecting pensioners and salami-slicing the rest. Labour will be much more likely to raise taxes. We’d all like the specifics of these strategies outlined before May. I doubt we’ll get them.

This article first appeared on Conservative Home.

Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.

1 thought on “The second urgent election issue on which the parties are silent. Where will they make most of their cuts?”

  1. Posted 11/03/2015 at 11:36 | Permalink

    Of course, the really big unknown, and the factor that will probably have the biggest impact on the public finances, is GDP growth.

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