Tax and Fiscal Policy

A review of the election manifestos: fiscal policy and public spending

The four main parties (on the basis of their likely share of the UK vote) have all now published their manifestos for the general election on 4th July. The boldness of the commitments appears to be inversely related to the number of seats that each party is predicted to win. But every party has a credibility problem when it comes to their plans for tax and spending.

At one extreme, Reform is the only party that offers anything much different from the others. Their manifesto promises tax cuts and targeted spending increases which Reform has costed at £141 billion a year, offset by expenditure savings of £150 billion and a revenue boost of £10 billion from stronger economic growth. These numbers are about ten times larger than figures in the ‘mainstream’ manifestos.

However, they are also ‘back of the fag packet’ stuff. In particular, Reform has simply assumed that public expenditure can be cut by 5%, saving £50 billion annually. To do this it would ‘slash wasteful spending, cut bureaucracy, improve efficiency and negotiate better value procurement without touching frontline services’. Other parties have been promising this for decades.

Reform has also pencilled in £35 billion of savings from ending the Bank of England’s practice of paying interest on the reserves created under the policy of ‘Quantitative Easing’ (QE). Many economists – myself included – are sympathetic to the case for making some savings here, but the figure of £35 billion is unrealistically high.

Nonetheless, Reform is at least thinking out of the box. On the tax side, there is a lot to like, including raising the personal allowance to £20,000, getting rid of the VAT ‘tourist tax’, cutting Stamp Duty and Inheritance Tax, and reducing taxes on small businesses.

Reform’s antipathy towards ‘environmental levies’ might be going too far – carbon taxes have an important role to play in addressing climate change – but the strategy for ‘Net Zero’ does need a fundamental rethink.

In short, Reform’s fiscal credibility problem lies on the spending side. If Reform could deliver on shrinking the size of the state, the overall tax burden would be lower and the economy more efficient. But that is obviously a huge ‘if’.

At the other extreme, Labour’s manifesto is the most cautious, clearly the ‘safety first’ strategy of a party already expected to win a landslide. In particular, Labour has ‘doubled down’ on the existing fiscal rules, leaving little room for increases in spending, while promising not to touch a wide range of individual taxes.

Labour’s credibility problem is that few seriously believe that they will not raise taxes further. Indeed, it is hard for any party to rule out tax rises, given the many and increasing demands on public services. But it may be even more difficult for Labour given the extra pressure for more spending from the party’s core supporters and, perhaps, their greater willingness to see the tax burden rise further to pay for this (especially if they think these taxes will be paid by other people!).

Labour has not boxed itself in too much on tax either. The Party has said it will not be necessary to raise taxes to pay for the additional measures in the manifesto, aside from the tax increases already announced, and ruled out increases in ‘taxes on working people’ in any circumstances.

However, this still leaves plenty of scope for raising more revenue in other ways. It is easy to imagine a scenario where the new Chancellor says that the public finances are in a worse state than she had anticipated. This would be a bit of a cop out, but a newly-elected government with a large majority might be more able to get away with blaming the last lot.

Labour’s promise not to raise taxes on ‘working people’ is pretty meaningless too. It could just be interpreted as a commitment not to raise taxes on income from employment. But in practice, many ‘working people’ also pay tax on income from capital or savings.

It is important also to look beyond just where the initial impact of a tax lands. A large increase in capital taxes that, for example, hammers investment and jobs would also have knock-on effects on ‘working people’ too.

The Conservatives manifesto is bolder than Labour’s in many respects. In particular, it includes some specific tax cuts, focusing on National Insurance. But the Conservatives’ big credibility problem is, of course, that the overall tax burden has already risen sharply on their watch. Moreover, the burden would continue to climb even on the basis of their manifesto commitments, albeit at a slower rate.

This criticism is not necessarily fair. Taxes would probably have risen at least as much over the last few years if Labour had been in power, given the fallout from Covid and the energy crisis. The Conservatives have at least rebalanced the burden away from taxes on workers earning average incomes.

But there is a further credibility problem – which applies to Labour too. The tax measures that are in the manifestos seem to have been chosen for maximum political appeal, rather than any strong economic logic. Examples from the Conservatives include a higher personal allowance for people on the state pension, and the fast-tracked abolition of National Insurance contributions for the self-employed.

Examples from Labour include extending the windfall taxes on energy companies and charging VAT on school fees but not (yet) on private healthcare. And related to this, there seems to be very little appetite for serious reform and simplification of the tax system, from either main party.

Finally, and only briefly, the Liberal Democrat manifesto is not much different from Labour’s. It is arguably more honest in acknowledging the additional spending pressures, notably on social care. But the actual proposals on tax and spending are relatively modest.

To be clear, tax rises may not be inevitable – even under Labour. There are several factors that could still come to the rescue, including stronger economic growth, a recovery in public sector productivity, and savings on the welfare bill.

There are also changes that any government could make to the fiscal and monetary frameworks to increase the amount of headroom for tax cuts or spending increases. Examples here include redefining the debt rule to target total public sector debt rather than debt excluding the Bank of England, or a less ambitious reform of the payment of interest on QE reserves. Neither of these changes would be likely to worry the markets.

Nonetheless, the tax burden is still likely to rise further under any of the programmes favoured by the three established parties. The only bold offering comes from Reform, but this is also the least well thought through (both on fiscal policy and other issues, notably immigration). Otherwise, the manifestos are pretty thin gruel.


This article was first published on Julian Jessop’s blog.

Julian Jessop is an independent economist with over thirty years of experience gained in the public sector, City and consultancy, including senior positions at HM Treasury, HSBC, Standard Chartered Bank and Capital Economics. He was Chief Economist and Head of the Brexit Unit at the IEA until December 2018 and continues to support our work, especially schools outreach, on a pro bono basis.

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